The two types of title insurance are Lenders title insurance, also called a Loan Policy, and Owner’s title insurance. Most lenders require a Loan Policy when they issue you a loan. The Loan Policy is usually based on the dollar amount of your loan. It protects the lender’s interests in the property should a problem with the title arise. The policy amount decreases each year and eventually disappears as the loan is paid off.
Owner’s title 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.
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 claiming to own the property; or forged deeds could cloud the title. Owner’s title insurance offers financial protection against these by negotiating with third-parties, and paying claims and the legal fees involved in defending the title.
As a matter of fact, the title insurance industry paid out nearly $700 million in claims in 2004. Some of those claims result from industry errors, to be sure. But by far the largest portion of claims payouts results from deliberate fraud and forgery perpetrated on homeowners and business. Here are three short stories that illustrate 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 trio 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.
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.
When you refinance you are obtaining a new loan, even if you stay with your original lender. Your lender will require lender’s title insurance to protect its investment in the property. You will not need to purchase a new owner’s title policy; the one you bought at closing is good for as long as you and your heirs have an interest in the property.
Even if you recently purchased or refinanced your home, there are some problems that could arise with the title. For instance, you might have incurred a mechanics lien from a contractor who claims he/she has not been paid. Or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property it is financing is clear.
If it has been no more than 10 years since you bought your house or refinanced, ask for a reissue or discount rate. They are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask.
Construction of a new home raises special title problems for the lender and owner. You may think you are the first owner when constructing a home on a purchased lot. However, there were most likely many prior owners of the unimproved land. A title search will uncover any existing liens and a survey will determine the boundaries of the property being purchased. In addition, builders routinely fail to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on your property. Again, lenders want to be sure the property has clear title, and they are insuring the correct property. Purchasing owner’s title insurance will protect you against these potential problems and pay for any legal fees involved in defending a claim.