What Is Title Insurance?
Do I Need Title Insurance?
What is title insurance exactly and do I really need it? I'm buying a foreclosed home through VA and have been told it's a "must" to have this but I'm wondering if the title company has done it's job properly with the title search then what am I paying for? Please help.
Title Insurance Protects You from Human Error
Title insurance is almost always a requirement if you are purchasing real estate using other people's money (i.e., a loan). Without clear title ownership to a property, your claim of ownership can be nullified.
Just because you receive a deed for a property you purchase, doesn't mean you are the sole legal owner. Prior owners, prior spouses of owners, partial owners, and creditors having a stake in the property need to be paid off or removed from the "chain of title" to be sure that ownership is all yours.
A title search, conducted as part of the settlement or escrow process, looks through the history of property ownership, as well as through books of claims to the property (judgments, liens, etc.) at the county courthouse. Title insurance protects you, and the lender, in the event this imperfect human being makes a mistake and overlooks a claim from someone. But what if the searcher does a perfect job? Does that eliminate the need for title insurance?
Only if you believe the county workers never make mistakes. If they misfiled a claim, or an instruction to record a deed or claim, the title searcher could be looking for something that is impossible to find.
Title insurance is a one time expense, unlike hazard insurance. While it's purchase is optional, if you are not using a lender, it is usually a wise investment. If you are using a lender, you will most certainly be required to purchase it. In my 20 years of experience in the real estate business, I have never seen an example of a transaction that clearly did not need title insurance.
For more questions, feel free to contact me at email@example.com.
editor's note: Bob is a Realtor who has contributed articles on home buying in the past. You can find him in our author's index.
An Insider View
I am in the industry, and believe me, when I purchase a home, I will most certainly purchase title insurance. After all, there's not any other insurance I know that lets you pay a one-time premium for coverage that lasts the entire time you own the property. The title company will research the property to be certain that there are no unpaid liens and/or assessments from governmental agencies such as the tax office, code enforcement, IRS, etc. They will then insure you, (the premium varies from state to state) for the full purchase price. In other words, they insure that the property is indeed in the seller's name and that there is nothing of public record that will cause a lien to be placed on your property. (In Florida, the Seller generally pays the premium for the policy)
Title Insurance Absolute Must
I am a civil engineer at a company which focuses mainly on residential surveys in Southern California. A title insurance policy is an absolute must in my opinion for the following reasons:
- You are not covered under the lender's title policy. Any claims against the title (a forged signature by a spouse at any time in the past, etc.) may leave you homeless and out your equity.
- Don't count on the thoroughness of the title insurance company. If there was an error in a legal description at some time in the past, it is likely that it was never corrected. A lot of people at the title insurance companies don't really understand legal descriptions and will just use the last one recorded for that property. Your agent probably has a relationship with a local surveyor and can ask him/her to check to see if the description makes sense as a courtesy. I caught such an error this week.
- Since your land is most likely much more valuable than the structure on your property, it's a good idea to have a legal verification of the amount of land you are actually buying. I checked the area of another lot as a courtesy recently and the broker's estimate (they will never guarantee square footage) was off by about 600 SF. What you pay is usually based in some respect to the square footage of your property and you could end up paying too much. If you have a decent understanding of trigonometry, you should be able to make these calculations yourself. If your lot is bounded by a curve or is an odd shape with a lot of nonparallel lines, it might be tricky.
- The only way to see if there are any easements (for power poles, water rights, etc.) is by having a title policy.
- If at any time you need to remodel, build a fence or decide to build a new house, you will probably want one to get a complete (showing all easements) survey to turn in for your building permit.
I would also find out if a survey is customary in your area. In ours, sometimes people are surprised to find that the fences can be several feet off of the property line. Great if you're using someone else's property without paying for it, but not so great if you're losing property. Also, a pretty ugly situation if your neighbor has a survey done later and finds your deck, etc. is encroaching on his property. And if you're planning an addition, you may have minimum setbacks required, in which case, the city will either not issue a permit or require a variance. Granted, a lot of this depends on your neighborhood. Here by the beach, heights and property lines are a big cause of disputes between neighbors due to the high cost of the land and views. Regardless of whether you decide to also have a survey, I strongly recommend a title insurance policy.
When a person buys real property, she wants to be sure that she is getting clear title to the property. Usually, part of the home buying process involves a title search to make sure that the seller does, in fact, own the property and the property is free of any liens. The title searcher may be an attorney who searches the records at the county courthouse to make sure the title is clear. The title searcher will probably research every property transfer recorded in the court house for that particular property for a period of 50 to 70 years (the "chain of title"). After the search, the buyer can be reasonably sure she is getting clear title.
Problems can occur when, sometimes years after the purchase, someone shows up and says "Hey, I'm the real owner of this property." Perhaps, a former owner died leaving what everyone thought were no heirs. The executors of the estate go ahead and sell the property. Years later a long lost child appears to claim the property. Or, perhaps a former co-owner signs away his interest in the property and years later appears to say he was coerced into signing. Or, most problematic of all is when a sale is made and the transfer of ownership isn't recorded in the county courthouse. A deed that has not been recorded is still valid! The title searcher has no way of knowing the former sale even took place!
Title insurance is issued by an insurance company covering the purchaser and her heirs for as long as they own the property. The two most common types of policies are those issued to the owners and those issued to the lender (if a mortgage is involved). Only one premium is paid for either policy and that is at the time of purchase. (Guess who pays the premium for the lender's policy?) If a purchaser has a mortgage and pays only one premium, she is probably only protecting the lender and not herself. he policy insures against loss if (1) the title actually belongs to someone else, (2) the title is subject to a lien or encumbrance, (3) the owner lacks access to and from the land, and (4) the title is unmarketable.
Many times, a purchaser balks at paying for title insurance because of the cost. The cost may be reduced if the person selling the property has title insurance and the policy can be reissued to the buyer. In any real estate transaction, I think the buyer should give careful consideration to purchasing title insurance. Like any insurance, one has to consider the cost of the policy and the financial loss that might occur. Also, it pays to shop around.