We’re all familiar with various types of insurance; health, auto and life insurance come quickly to mind. But title insurance is another type of insurance that, though you may only use it for a few days once or twice in your lifetime, could be just as important to your financial wellbeing as the others.
Title insurance is an essential part of the home-buying process. It insures the new buyer has clear, clean and merchantable title to the property just purchased and can protect the buyer from unwelcome surprises down the line.
Understanding the title process is important for every homebuyer. Through an examination of public records and other material that can go back 50 years or more, a title search will uncover any problems associated with the property, such as liens, past-due property taxes, court judgments and claims. There may even be disputes over a will crafted by a past owner.
Unearthing these issues before the transfer of the property takes place protects not only the buyer, as previously mentioned, but the lender, whose loan could be endangered by past claims that come to light after the transaction. The risk is avoided by both the buyer and the lender by having title insurance.
Lender’s title insurance protects the lender from title defects such as fraudulent acts or prior liens that could prevent the mortgage from being valid and enforceable against the property. It also insures the lender is in a first-lien position in the event of a default or foreclosure. It helps ensure the mortgage will not be hampered by unknown encumbrances. But if some problems are uncovered during the lender’s title search, it could hinder the present owner’s ability to sell or the buyer’s ability to borrow.
Owner’s title insurance protects the new buyer. After such a large investment, no one wants to discover after the transaction there are old or unpaid liens from the previous owner on the property, which would prevent the new buyer from selling the property cleanly down the line. If title defects are missed during the title search, title insurance provides financial protection for expenses related to the issue.
The number of issues that can impact a title is broad. The most prevalent title problems include:
- Property taxes
- Illegal deeds
- Inheritance issues
A lien is a legal claim to assets, and liens pop up frequently during title searches. If improvements have been made to the house, contractors file liens – financial claims – to ensure they’ll be paid. Some liens are not filed properly; others never are properly marked that the payment has been made. Liens can take weeks to resolve, especially if, in the example of contractors, they are no longer in business or have left the state.
A deep dive into the history of the property could uncover delinquent taxes – i.e., real estate taxes that were never paid and are still owed to the government. In fact, it could be the person selling the house. Since annual property taxes can be 1-2% of the purchase price, depending on the state, it’s well worth finding out whether they’re paid up.
A deed is a document that will list the buyer and seller. Those with a deed have title to the property. In the past, deeds may have been held by those who had no right to possess one, such as a minor. Any problems with past deeds may affect present ownership.
There could be conflicting claims to the property due to a past inheritance. A title search will uncover if they have any impact on the transfer of the property.
It is up to the seller to fix any problems. For example, if the issue is delinquent taxes, the seller must pay them for the transaction to proceed. Even if the issue is extremely minor, it must be addressed, or the sale can not go through.
Forty-nine states offer title insurance. Which one is the outlier? Iowa. Back in 1947, the state outlawed private title insurance after a number of insurers went belly up after a severe real estate downturn. The state of Iowa now acts as a type of title insurer known as the Iowa Title Guaranty.
Every homebuyer should opt to purchase title insurance and find out everything they need to know before buying title insurance. Why? Unless you ask a title company to perform a title search, you will have no idea what troubles from the property’s past can come back to haunt you. Given the size of your investment in a new property, the last thing that you need is an unexpected large expense.