Performing a title search and obtaining title insurance are two key steps in the closing process for a mortgage. Put simply, they protect and insure against issues with the property that could bring the true ownership of the property, or some part of it, into question.
A title search traces the history of the property to search for any problems or questions about the ownership. The ownership history is established and recorded through searches of public records for any outstanding liens or other encumbrances that may interfere with clear ownership of the property.
Outstanding liens refer to any unpaid debts or obligations against the property, such as unpaid back taxes. Encumbrances refer to any legal claims or issues with the title. Examples include forgery or fraud regarding a deed, an issue with an easement, or errors or omissions in paperwork that had not been previously disclosed.
In essence, the title company performs a search and notifies you of any ownership issues or paperwork irregularities that it finds with respect to the property, and issues any insurance at the closing date to protect against any concerns that they missed in their search. If problems are found, the seller may be required to resolve them before the title company will issue title insurance and allow the closing to proceed.
Buyers choose their own title company. It is against the law under RESPA (Real Estate Settlement Procedures Act) for anyone else involved in the process to require that a buyer use a particular title company.
Title insurance provides protection in the event liens or encumbrances are discovered after closing. It covers legal fees and any relevant losses. Typically, it is paid at closing with a single premium payment.
There are two types of title insurance:
- Loan Policy – This protects lenders from losses that occur from a defective title that is challenged. Coverage will normally be equal to the amount of the mortgage. The policy is valid until the property is paid off, refinanced, or sold.
- Owner's Policy – This protects the owner from losses in cases where the title was defective prior to closing, but the defect was not discovered until after closing. The policy is valid as long as you own the property.
As a buyer, you do not have to purchase owner's title insurance, but your lender is almost certain to require that you purchase lender's title insurance. In some cases, you can negotiate that the seller purchase an owner's policy for you as part of the agreement.
Title insurance will not protect you in several cases:
- Prior Knowledge – If you knew about a defect in the policy and did not disclose it, that defect is not covered.
- Exclusions – Any exclusions specifically written into the policy are not covered. An example would be a recorded covenant affecting how the property can be used, or use of eminent domain.
- Defects After Closing – Any title issue that occurs after the closing date is not covered. Discovering an issue that occurred prior to closing is covered, but new issues are not.
If you have to file a claim on an owner's policy, contact the insurer as soon as possible in writing. Include a copy of the policy with your letter. The title insurer must acknowledge receipt of your claim and settle it within the amount of time that is reasonable for the type of claim that is made.
Title insurance can give you valuable peace of mind as you enter into rewards and responsibilities of home ownership. We hope that you will never need it.