Getting title insurance is one of the standard steps homebuyers take before closing on a home purchase. Title insurance is crucial for a homebuyer because it protects you and your lender from the possibility that your seller does not have, or previous sellers do not have, free and clear ownership of the home and property and therefore therefore cannot legitimately transfer full ownership to you. Although the chance of making a claim for coverage is relatively low, the value of what you stand to lose if you go without coverage is high; in fact, you could lose the house.
Read on to learn how title insurance works, how and why you could lose your home without title insurance, and how title insurance helps protect you.
how to get title insurance
Your escrow or closing agent will begin the process of obtaining your title insurance shortly after the purchase agreement is signed. Generally, your closing agent or attorney will choose your title insurer for you.
You will probably have to pay a one-time fee of about $1,000 for title insurance. (However, in some states or localities, the seller traditionally pays the bill.) the process is very standard and is likely to go smoothly.
what could happen if you don’t get title insurance?
This is how things could go wrong. In the most extreme case, sellers could knowingly try to sell you a home that they don’t own. there have been cases of tenants posing as sellers. however, the typical problems of the title are less worthy of a police show, but more complicated.
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for example, the seller might have bought the house ten years ago with a brother he hasn’t spoken to since, and doesn’t know that he now needs his brother’s signature to sell. or sometimes trouble lurks in the more distant past. for example, the seller could have bought the place from a single woman, not realizing that her ex-husband was still a co-owner of the property and had not signed off on the sale as required. Or the seller could have inherited the house under the terms of a will that, whoops, turns out to be expired and a more recent will leaves the house to someone else.
Not all title problems involve the whole house. for example, persons or agencies may have filed liens against the property—legal claims to be paid out of the proceeds of the sale of the property, in order to settle the debt the owner owes them. The most common types of property liens seek payment of debts related to taxes, child support, and contractor fees (often referred to as “mechanical liens”). These liens stick to the house like glue, until the house is sold or foreclosed. Property boundary disputes also often lead to title insurance claims.
In any of these situations, title insurance will step in to help. An important note about cooperative housing: If you’re buying a cooperative, where you won’t actually own any real estate (just stock in a corporation), title insurance is not needed.
title insurance: lender’s policies and buyer’s policies
Title insurance is usually a combination of two policies: a lender’s policy and a borrower’s policy. Your lender, assuming you’re taking out a home loan, will require you to purchase a lender’s policy (also called a “mortgage policy”) to pay legal defense costs and repay any mortgage payments you can’t make because you lost the house to the mortgage. someone else’s claim.
The lender may also require you to purchase an “owner’s policy” to cover your own legal fees and other losses, as a further step toward protecting the lender’s warranty. Even if your lender doesn’t require you to buy an owner’s policy, you should probably consider buying one anyway.
Why do you need both policies? Without a preliminary title search (see below for more on title searches), no matter how thorough it is, you can predict when a lost relative or heir or if paperwork buried for years under a misspelled name will reveal a claim to the property. The lender’s policy will kick in to defend such claims and, if all goes well, may settle the matter against whoever raised it.
But what if the court decides that, for example, the long-lost relative is in fact the true owner of the house? then the lender’s policy will reimburse him what he owes on the mortgage, but he won’t have to pay the amount of his down payment and other principal payments, not to mention that he will no longer own the home. The homeowner’s policy, however, will cover his financial losses (although he may still have to move out of the house).
how the preliminary title report helps ensure a clear title
Nobody wants the past to come back and bite the buyer like this, so the title insurance company will perform a “title search” as their first task before issuing the policy. (Or your attorney may handle this, depending on the custom in your state.)
The search involves reviewing public records related to the home, including past deeds, wills, trusts, divorce decrees, bankruptcy filings, court orders, and tax records.
The resulting preliminary title report (sometimes called a “title insurance commitment,” “title commitment,” or “lien report”) gives everyone an opportunity to iron out trouble spots before proceeding with the sale, or to call the sale off, if something too serious is discovered. it also lets everyone know the conditions under which you will be offered insurance. for example, the policy will not cover some things that cannot be known or clarified (exclusions).
Fortunately, you shouldn’t be the one to act on title flaws. Since you are promised a clear title, any clouds that arise are the seller’s problem, not yours. The closing agent will usually call the seller’s real estate agent or attorney if the report shows a defect. most sellers agree to pay any liens by deduction from the purchase money at closing.
For more information on buying title insurance and other legal and practical tasks related to buying a home, check out Nolo’s Essential Guide to Buying Your First Home, by Ilona Bray, Ann O’Connell and marcia stewart (nolo). If you ever end up in a situation where you might have to make a title insurance claim, consider consulting with a local real estate attorney to review your options.