When you close on the purchase of a new home, you’ll be issued a title insurance policy. What is title insurance, and why is it so important for you to have it?
What is title insurance coverage?
Title insurance protects you against any disputes over the ownership of your home after your purchase it. Your title insurance company will research public records looking for any legal claims against the property. Once the title company is satisfied that the property’s seller can convey a “clean” title to you as the new owner, it issues a title insurance policy that protects you from being liable for any title disputes that could arise later. If the homebuyer will have a mortgage, the mortgage lender will get a separate title insurance policy to protect its financial interest in the property.
The importance of title insurance cannot be overstated. Buying a house is likely the biggest purchase you’ll ever make, and you’re investing much of your life savings. A dispute over the ownership of your home could put all you have invested at stake.
Though title insurance companies are scrupulous in searching public records for “clouds” or encumbrances — in other words, claims against your ownership — some situations can escape scrutiny and jeopardize your title. Fortunately, title insurance will protect you if one of the following issues should arise.
Types of title disputes
Unknown liens: A lien is a legal claim against a property, generally for some debt a past or present owner owes. The house is considered collateral to resolve the debt should the person who owes the money default. For example, a mortgage company has a lien on a house in the amount of the owner’s outstanding debt, and a taxing authority can place a lien on a house for unpaid tax debt. In most cases, liens stay with the property, even if the person who owes the debt no longer owns the property. That is why a new owner could be in jeopardy if the lien holder presses its claim.
Although most liens are public records, some are not. For example, a prior owner of your new home may have never paid what it owes to a remodeling contractor. The contractor, who has a legal contract showing that he has the right to file a contractor’s lien if he is not paid, may not have publicly invoked that right at the time you buy the property. Likewise, if you buy a foreclosed property, you may find that the creditors of the distressed owner have liens against your new house. When and if such liens appear, your title insurance will protect you.
Heirs: When a person dies, it’s possible that the executor of the person’s estate may be unable to find one or more of the heirs listed in the deceased’s will. Or the person’s will may not be found until much later, after a court has administered the estate and a new owner has the house. Suddenly heirs come forward with a claim against the home.
Marriage and divorce complications: A previous owner of your home may have titled the property in his name only but was married. If he later goes through a divorce, his former spouse may make a claim against the house.
Public record errors: Everyone makes mistakes, and it’s possible a lien or other encumbrance on the property is misfiled through clerical error and does not show up in the title company’s search. It later emerges when the lien holder comes forward.
Survey and encroachment issues: When a property’s boundary is in dispute, it can interfere with the owner’s ability to convey clear title to a new owner until the matter is settled. Boundary disputes can arise when a previous survey was drawn incorrectly, or an adjacent property owner’s survey shows different boundaries. A related circumstance happens when a property owner builds a fence or other structure that crosses a property line.
Easements: An easement is a legal right, granted by a property owner, for someone other than that owner to enter the property. For example, utility companies have easements allowing their lines to cross over properties the companies don’t own. It’s possible you won’t find out about an easement until after you have closed on your new home. This will not jeopardize your ownership, but you’ll be legally required to give access to whoever holds the easement.
Fraud: A growing area of title problems is outright fraud. These situations typically arise when a criminal targets a property by posing as its owner and files a quitclaim deed transferring the property to himself or some accomplice in the crime.
For these reasons and others, title insurance is vital to protect your investment in your home.
Related – What Does it Mean to Have Clear Title?