For most Americans, buying a home is the single largest financial investment they will ever make. And while property ownership may seem very straightforward, a homebuyer’s rights to enjoy their property aren’t always as clear. There are dozens of ways in which the title to – and ownership of – a property can be jeopardized. The title insurance process helps reduce the likelihood that title issues will arise, and the policies subsequently issued help protect against loss when a buyer’s ownership rights are challenged.
Title Search and Exam
While the function of most other forms of insurance is risk assumption through the pooling of risks for losses arising out of unforeseen future events (such as sickness or accidents), the primary purpose of title insurance is to eliminate risks and prevent losses caused by defects in title arising out of events that have happened in the past. This is where the title search and exam – the first steps in the title insurance process – are critical.
Skilled title professionals search and examine various public records to find and isolate title risks. This is intricate and tedious work, as information can be missing or filed inconsistently. These professionals examine documents such as judgments, liens, general taxes, utility assessments, as well as many others. In certain transactions, real property characteristics may also be evaluated, which include zoning, location, surveys, improvement type, and more. Additionally, these searches serve to identify any potential title risks, such as unreleased mortgages, mechanics’ liens, tax judgments, outstanding child support liens, pending bankruptcy or divorce proceedings, probate issues, etc.
One out of three searches turns up title issues that can affect a buyer’s property ownership rights. Once identified, title professionals may take measures to remedy these problems, or otherwise insure against (or around) the identified risk. Many property buyers receive their policy of title insurance without ever knowing that this important work was completed behind the scenes to protect their interests.
Policy of Insurance
Once the search and curative work is completed and a property’s title is determined to be in insurable condition, the transaction can close and a policy of title insurance can be issued. In addition to insuring against loss arising from record matters, other than those excepted or excluded from coverage, if any, the policy also insures against loss arising from certain title risks that are undiscoverable from public records, such as forgery, fraud, and lack of capacity in prior transactions.
Two categories of residential title insurance are available:
Owner’s Policy For a one-time premium (paid at closing), an Owner’s Policy protects the homeowner from enumerated title risks for as long as the insured (or their heirs) owns the property. Extended policies and expanded coverage can also be issued to address title issues that may arise after the policy date, including false claims by others, encroaching structures built by neighbors, and more.
Loan Policy A Loan Policy is generally required by lenders (and purchasers of loans in the secondary mortgage market) to help protect against unforeseen title problems. While an owner’s policy covers the purchase price of the home, the lender’s policy covers the amount of the loan on the property. This policy may insure that the lender has a lien that is valid and enforceable, and that the lender’s lien has priority over other liens. Extended policies and expanded coverage options are also available to lenders.
Settlement and Closing Services
Title professionals also conduct the settlement and/or closing of the property sale or refinance. For most transactions, the process requires more than 100 time-consuming steps. These might include reviewing the contract or closing instructions, depositing loan funds, paying off prior mortgages, coordinating property inspections, preparing HUD-1 settlement statements, among many others. These professionals then coordinate and finalize documents, close the transaction, and submit pertinent documents for proper recordation in public records.
As with any insurance contract, the insuring provisions express the coverage afforded by the title insurance policy and there are exceptions, exclusions and conditions to coverage that limit or narrow the coverage afforded by the policy. Also, some coverage may not be available in a particular area or transaction due to legal, regulatory, or underwriting considerations. The services described above are typical basic services. The services provided to you may be different due to the specifics of your transaction or the location of the real property involved.