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Frequently Asked Questions
Title insurance, especially owner's title insurance, is
extremely important when purchasing a house or piece of
property. Yet many consumers are unsure about what title
insurance is and what it protects against. Here are some
answers to the more common questions about title insurance.
Choose a question from the list below:
Why do I even need to use a title company?
What is title insurance?
If I have Title Insurance, why does my lender
need it as well?
If a search is done on the property and it has clear title
... then the title is clear, and I shouldn't need title
insurance, right?
Why does the closing take place at the Title Company?
What are my closing costs?
How Am I Protected?
Common Title Problems
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Why do I even need to use a title company?
"Why is it all so complicated?" you might ask. "When we buy
or sell property, why do we have to use escrow?" The reason
is that escrow is a way of protecting everyone participating
in a real estate transaction. When real estate is sold, the
title to ownership of the property passes from the Seller to
the Buyer. And, today, even the simple sale of a residential
property can involve a lot of money.
As a Seller you do not want to give up title to your
property before you receive payment for it. And as a Buyer
you do not want to part with your funds before receiving a
clear title to the property. The Seller may have a mortgage
on the property which must be paid off before the title is
clear. And other claims - such as taxes, insurance, and
liens - must be satisfied before a clear title can pass to
the Buyer.
A Buyer may be taking out a mortgage, which means his or her
lender will have a claim against the property. And the Buyer
may have others involved, who will make a claim against the
property. All of these parties want to be sure that their
rights are protected and that they receive the money or
property to which they are entitled.
Escrow and closing is the way all this is handled.
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What is title insurance?
Title Insurance is an indemnity against a loss resulting
from defects in title to the property. This is a one-time
fee, which will pay for any expenses in defense of any
lawsuit brought against the insured title.
Title insurance is a policy guaranteeing ownership of real
estate. The need for title insurance arises from the fact
that real estate transactions are complex and technical.
Any legal error, no matter how detailed or minute, may cause
a defect in the title that impairs its marketability. In
contrast to most insurance policies, which cover losses
incurred during the policy term, title insurance covers only
losses caused by title defects that have already occurred
but are not known when the policy is issued. Examples of
such defects are forgeries, invalid or undiscovered wills,
defective probate proceedings, or transfers of property by
persons lacking full legal capacity to execute a contract.
The title insurance company searches the courthouse records
to determine the property location, names of present and
previous owners and any pertinent information concerning the
particular piece of real estate. This includes searching
deeds, mortgage records, tax rolls, lawsuits, judgments, and
other miscellaneous records. After research is completed, a
commitment for title insurance is prepared. This simply
describes the interest to be insured, the current owner, the
real estate, the amount of coverage (usually the purchase
price in an owner's policy or the mortgage debt in a
mortgagee's policy), and any requirements, exceptions or
defects. The title insurance commitment assures that every
possible defect on the title to the land, that can be
discovered from the public records, has been called to your
attention so that such defects can be corrected.
The closing department oversees that all requirements are
met, all defects are addressed, and that all necessary
paperwork is executed to perfect the proposed insured's
interest. After recordation of all necessary documents, a
final policy is issued.
In the event that a defect in the title which was not set
forth in the final policy is discovered, the title company
will be called upon to pay the loss or defend the title much
the same as other casualty insurers.
There are two types of Title Insurance policies: An Owner's
policy, which insures the new owner of the property and a
Lender's Policy, which insures the mortgage company holding
the lien on the property.
Owner's Policy insurance is usually issued in the amount of
the real estate purchase. It is purchased for a one-time fee
at closing and lasts as long as you or your heirs have an
interest in the property. This may even be after the insured
has sold the property. Only Owner's title insurance fully
protects the buyer should a problem arise with the title
that was not uncovered during the title search. Owner's
title insurance also pays for any legal fees involved in
defending a claim to your title.
Lenders Policy insurance, also called a Loan Policy, and
Owner's title insurance. Most lenders require a Loan Policy
when they issue you a loan. It protects the lender's
interests in the property should a problem with the title
arise.
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If I have Title Insurance, why does my lender need it as
well?
You both want to be protected. You will be protecting your
interest by making sure that if something is wrong with your
title, you will have a Title Insurance Company to clear any
problems.
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If a search is done on the property and it has clear title
... then the title is clear, and I shouldn't need title
insurance, right?
Not necessarily. The land you live on has existed since the
earth was created, and ownership has transferred numerous
time since the earliest settlers. If any of the documents
were recorded incorrectly or can be proven to have been
forged, then the ownership of the property would be in
question. Title Insurance protects you from these mistakes!
The following are just a few of the common Hidden Risks that
can cause a defect in your title:
Mistakes in recording legal documents, i.e. indexing
incorrectly
Unsatisfactory acknowledgment by notary i.e. notary
commission is expired
Forged documents such as deeds, mortgages, satisfaction of
mortgages
Impersonation of the true owners of the property signing
documents
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Why does the closing take place at the Title Company?
The Title Company will perform a search on the existing
property to provide the buyer and lender with clear title to
the property. The Title Company may also coordinate and
collect information from the termite company, land surveyor,
hazard insurance company and real estate agent (if
applicable) to complete the closing.
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What are my closing costs?
Your closing costs will depend on the type of mortgage that
your buyer will be obtaining. Each type of mortgage has
specific fees that must be paid by each particular party.
There are 3 basic types of mortgages, VA, FHA, and
Conventional. Under each type of mortgage you will find a
list of fees, and the party responsible for paying them.
Keep in mind that not all mortgage companies will charge all
of the fees that are listed, and all fees are estimated.
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How Am I Protected?
In order to issue title insurance, the title company must
search public land records for matters affecting that title.
Many search the "chain" of title back 50 years. Twenty-five
percent of title searches find a title problem that is fixed
before the insurance is issued. Some examples of items that
can cause a problem are: deeds, wills and trust that contain
improper information; outstanding judgments or tax liens
against the property; and easements. Title companies fix the
problems then issue the title insurance.
Occasionally, in spite of an exhaustive title search, hidden
hazards can emerge after closing. Things such as mistakes in
the public record, previously undisclosed heirs claming to
own the property; or forged deeds could cloud the title.
Owner's title insurance offers financial protection against
these by providing for negotiatiations with third-parties, and paying claims
and the legal fees involved in defending the title.
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Common Title Problems
Here are three short stories on some common title problems:
Fraud & Forgery
Those involved in real estate fraud and forgery can be
clever and persistent. which can spell trouble for your home
purchase.
In a western state, an innocent buyer purchased an
attractive home site through a realty company, accepting a
notarized deed from the seller. Then another couple, the
true owners of the property who lived in another locale
suddenly appeared and initiated legal action to prove their
interest in the real estate was valid. Under the owner's
title insurance policy of the innocent buyer, the title
company provided a money settlement to protect against
financial loss. As it turned out, the forger spent time in
advance at the local court house, searching the public
records to locate property with out of town owners who had
been in possession for an extended period of time. The
individual involved then forged and recorded a deed to a
fictitious person and assumed the identity of that person
before listing the property for sale to an innocent
purchaser, handling moot contracts through an answering
service. Also, the identity of the notary appearing on deeds
was fictitious as well.
Fraud and forgery are examples of hidden title hazards that
can remain undetected until after a closing despite the most
careful precautions. Although emphasizing risk elimination,
an owner's title insurance policy protects financially
through negotiation by the insurer with third parties,
payment for defending against an attack on the title as
insured, and payment of valid claims.
Conflicting Wills
Conflicts over a will from a deceased former owner may
suggest a study topic for law school. But the subject can
take on a reality dimension and all too quickly your home
ownership is at stake.
Alter purchasing a residence, the new owner was startled
when a brother of the seller claimed an ownership interest
and sought a substantial amount of money as his share. It
seemed that their late mother had given the house to the son
making the challenge, who placed the deed in his drawer
without recording it at the court house. Some 20 years
later, after the death of the mother, the deed was
discovered and then filed. Permission was granted in probate
court to remove the property from the late mother's estate,
and the brother to whom the residence initially was given
sold the house. But the other brother appealed the probate
court decision, claiming their mother really did not intend
to give the house to his sibling. Ultimately, the appeal was
upheld and the new owner faced a significant financial loss.
Since the new owner had acquired owner's title insurance
upon purchasing the real estate, the title company paid the
claim, along with an additional amount in legal fees
incurred during the defense.
Missing Heirs
When buying a home, it's important to remember what you
don't know can cost you. As an example illustrating the need
for precautions, The American Land Title Association pointed
to a couple who purchased a residence from a widow and her
daughter, the only known heirs of the husband and father who
died without leaving a will.
Soon after the sale, a man appeared - claiming he was the
son of the late owner by a former marriage. As it turned
out, he indeed was the son of the deceased man. This legal
heir disapproved of his father's remarriage and had vanished
when the wedding took place. Nonetheless, the son was
entitled to a share of the value of the home, which meant an
expensive problem for the unwary couple purchasing the
property.
Although the absence of a will hindered discovery of the
missing heir in a title search of the public records, a
one-time charge at closing, owner's title insurance will
safeguard against problems including those even an
exhaustive search will not reveal.
Source: American Land Title Association. Used by permission.
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