What every home buyer and seller needs to know about title insurance
Most home sellers and buyers have been informed that obtaining title insurance will provide them necessary protection over possible title defects; but many remain uncertain about why this is so — or even know what title insurance is. Title insurance protects a policyholder against challenges to rightful ownership of real property, challenges that arise from circumstances of past ownerships. Each successive owner brings the possibility of title challenges to the property.
Why the seller needs to provide title insurance
Any prospective buyer will need evidence that his investment in your property is free of title defects. In fact, your Purchase Contract will probably require it. The title insurance policy that you provide the buyer is a guarantee that you are selling a clear title to your property, unencumbered by any legal attachments that might limit or jeopardize ownership.
Why the buyer needs title insurance
Title insurance protects possibly the most important investment you'll ever make - the investment in real estate. Without a title insurance policy, you may not be fully protected against errors in public records, hidden defects not disclosed by the public records, or mistakes in examination of the title of your new property. As a result, you may be held fully accountable for any prior liens, judgments or claims brought against the property. However, your policy insures that if such an occasion arises, you will be defended free of charge against all covered claims, and paid up to the amount of the policy to settle valid claims.
How can there be a title defect if the title has been searched and a loan policy issued
Title insurance is issued after a careful examination of copies of the public records. But even the most thorough search cannot absolutely assure that no title hazards are present. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.
What title insurance protects against
Here are just a few of the most common hidden risks that can cause loss of title or create an encumbrance on title:
- False impersonation of the true owner of the property
- Forged deeds, releases or wills
- Undisclosed or missing heirs
- Instruments executed under invalid or expired power of attorney
- Mistakes in recording legal documents
- Misinterpretations of wills
- Deeds by persons of unsound mind
- Deeds by minors
- Deeds by persons supposedly single, but in fact married
- Liens for unpaid estate, inheritance, income or gift taxes
Why the Buyer Has to Purchase a Title Policy for his Lender
A lender goes to great lengths to minimize the risk of lending money for the purchase of real estate. First, the buyer's credit is checked to make sure the buyer can repay the loan. Then, the lender wants to make sure that the quality of the title to the property is satisfactory. The lender does this by obtaining a loan policy of title insurance, that the buyer pays for.
The loan policy does not protect the borrower
The loan policy protects the lender against loss due to unknown title defects. It also protects the lender's interest from problems which may exist, but may not be known at the time of the sale. But, this policy only protects the lender. It does not protect the borrower. That is why a buyer needs an owner's policy, which can be issued at the same time as the loan policy. This is usually paid by the seller.
What is the danger of loss if only a loan policy is issued?
If the lender has title insurance protection and the owner does not, what possible danger of loss exists?
As an example, assume a home was purchased for $800,000. A down payment of $160,000 is made, and a lender holds an $640,000 mortgage lien. The lender acquires title insurance protecting the lender up to $640,000. But the buyer's down payment of $160,000 is not covered.
What if a problem occurs and only a loan policy exists?
The title insurance company would defend and protect the interest of the lender. The buyer, however, would have to assume the financial burden of his or her own legal defense. If the defense is not successful, the result could be a total loss of title. The title insurance company pays the lender's loss and is entitled to take an assignment of the borrower's debt. The buyer loses the down payment, other equity in the property that may have accumulated, and the property. And the balance on the note is still due!
Why is an owner's policy, along with a loan policy your best protection?
Title insurance will pay for defending against any lawsuit attacking the title as insured, and will either clear up title problems or pay the insured's losses. For a one-time premium, an owner's title insurance policy remains in effect as long as the insured, or the insured's heirs, retain an interest in the property, or have any obligations under a warranty in any transfer of it. Owner's title insurance, issued at the same time as a loan policy, is the best title insurance value a property owner can get.
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