If you’ve ever looked into buying a home, you’ve probably heard about a little something called title insurance. This mysterious entity is an important part of any real estate transaction, yet is often poorly understood by everyone involved in the sale. Hopefully we can clear up some of that confusion and, once and for all, explain clearly the purpose and details of a title insurance policy.
What is a title?
Before you can understand title insurance, you obviously have to understand what a title is. In the most basic sense, a title is the legal right an individual has to own a piece of property. A legal document known as a deed serves as the evidence of this ownership. When you purchase a home, the title has to be transferred from the previous owner to you. Problems can arise, though, that may put what is referred to as a “cloud” on the title. A “cloud” is anything that brings into question the actual ownership of the property. Examples include:
- Claims by missing heirs and/or an ex-spouse
- Incorrect legal descriptions in prior deeds
- Missing prior satisfactions of mortgages
- Judgments against the current or prior owners
- Undisclosed easements or rights of way
- Delinquent property taxes or homeowners assessments
- Forged signatures
How can I find out about “clouds” on the title?
Typically, as a part of the selling process, the buyer in a real estate transaction will have a “title search” performed. A title search is a procedure in which all the documents related to the home’s title are combed for anything that may cause a “cloud”. Technically, anyone can do a title search, but it is usually performed by the title company dealing with the closing of the transaction or by a practicing attorney.
Who does title insurance protect and how?
As you may have put together by now, title insurance covers the policy holder from any loss of ownership interest. There are two kinds of title insurance policies, though. Lender’s title insurance insures your mortgage lender in the case of a loss of ownership. Your lender will require that you provide this as a condition of giving you the mortgage. The other type is owner’s title insurance, which, as the name implies, protects you in the case of a loss of ownership. It is completely optional, but in Brevard County unless you are purchasing a foreclosure, the insurance is typically paid for by the seller at closing.
Several days before closing on the purchase of your home you should receive a “title commitment” from the title company. This document is a commitment from the insurer to provide you with a title insurance policy based on the details outlined in the commitment. When you obtain this document, it is important to read the fine print and understand the policy completely. Like any kind of insurance, not all policies are created equal. Ask the title company to explain the document to you; and we recommend that you have it reviewed by your attorney.
Do I really need title insurance?
While owner’s title insurance may not be required, it is highly recommended. Imagine… you and your family have finally unpacked and settled into your dream home when you get a registered letter in the mail. This letter notifies you that someone is claiming that they are the legal owners of “your” home. Your first reaction would likely be to insist that it is impossible! But then you learn that the person who sold you the home had purchased the home from an estate. The executor of the will and the heirs to that estate are claiming that documents were forged and that the person who signed for the sale of the property did not have the legal right to do so. If this is true and they still legally own the property, you could lose your home and any money you put into it. This is just one of many many possible scenarios where you could lose what is likely your largest asset or have to pay off debts against the home that you were not aware of.
So remember, even if the title search did not bring up any clouds, there is still a chance something was missed and the ownership of your biggest asset could be jeopardized. Since owner’s title insurance is typically paid for by the seller, we urge you to negotiate for the seller to obtain a policy for you even if your lender does not require it.