The title is what gives you ownership of a property. As a buyer you want a clear or clean title — one that doesn’t have liens for unpaid taxes against it, or claims of ownership by a faraway aunt or uncle, or a surprise easement through the backyard to reach power lines or a cell phone tower.
As for your lender, he wants to know that the loan is going to a legitimate transaction — the seller really does own the property and therefore can sell it to you.
The Title Search
In other words, nobody wants an unpleasant surprise after the settlement. So a couple of things happen. First, a title search is conducted. Public records are examined manually or by computer or both. It depends on how pertinent records are kept in your area. The searcher looks at deeds, wills, and trusts, tracing the history of the property back many, many years. Among the important questions is whether all past mortgages and liens have been paid. Does anyone hold an easement? Are there any pending legal actions?
But what if the title search misses something and it comes back to bite after you’ve moved in? This could happen. Buyers have even been known to lose their houses because of clouded ownership — some past problem that wasn’t discovered.
The way to avoid losing everything is to buy title insurance, which is available from title insurance companies, title agents, or, in some states, attorneys.
Title insurance is a one-time, up-front investment with rates based on the purchase price of your home and the type of policy you buy. Some are more comprehensive than others.
Oversimplified, title insurance insures a homebuyer — and a mortgage lender — against loss resulting from title defects, whether these defects are known or unknown at the time of the sale or the refinance. In the language of the title industry, the insurance covers both “on record” and “off record” problems.
•A person in bankruptcy who has no authority to sign the deed conveys property to a third party.
•A grandson forges his grandmother’s name to a deed and conveys her property to a third party, or to himself.
•A mortgage (deed of trust) is properly recorded on the land records, but there is no legal description identifying the property that is subject to the mortgage. As a result, creditors are not put on notice of the existence of this mortgage lien, and may make another loan, which will not have first-trust priority.
•A deed (or other legal document) is improperly recorded with the wrong legal description.
The policy protects you by making the insurance company liable for most claims against your ownership. If a critical document was overlooked during the title search and you actually lose the house, you’ll likely receive damages — but only if you bought an owner’s title insurance policy at closing. You can see why experts advise you to do this.
Make sure you understand the policy you’re buying — what it covers and what’s excluded. The owner’s policy should cover your full sales price. If you want a policy that covers the value of your home as it increases, ask about adding an inflation rider.
Your lender wants a policy, too. He or she won’t even loan you money unless you buy a separate lender’s title insurance policy to cover the bank’s interest in your property. The lender’s policy should be for the amount of the mortgage.
In the end it is extremely important to buy your own Title Insurance Policy. I have seen quite a few instances where home owners have saved themselves several thousand dollars in attorney’s fees by making a claim against their title insurance policy.