What Is Property Title Insurance?
Property title insurance protects buyers and lenders against the potentially disastrous consequences of "defects" in the property's title, or deed, and has become increasingly important in the wake of mortgage lenders' halting of foreclosures in 2010 due to the kinds of sloppy proceedings that create title defects. What would happen if the last sale of the property was so poorly executed that another person could claim the house you bought as his own? Understanding title insurance can help you make informed decisions to protect you against costly outcomes like this.
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Title Defects and their Consequences
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An imperfection, or "cloud," on title can be a previous transfer of the deed that involved only one of the two owners' signatures, which means that the other owner effectively remains an owner and could make a claim to the property if you buy it. Another common title defect is liens or claims from legal judgments, unpaid property taxes or contractors' work. These claims must be satisfied in order to be removed from the title and, without title insurance, would become the next owner's costly responsibility to clear.
How Title Insurance Works
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A title insurance company performs a title search, or search of public records for any liens, judgments or other issues that may affect title. If it fails to detect an issue affecting title, and a claim on the property emerges after the sale, insurance provided by the title company covers losses that result.
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Who Buys Title Insurance?
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Mortgage lenders require title insurance as part of the closing, and though it's the borrower who usually pays the premium, the policy covers the lender's potential losses, not the borrower's. For example, a lender's title insurance protects the amount of the mortgage, not the $50,000 the owner later invests in improvements. The premium is directly related to the value of the property, so the more it's worth, the higher the premium.
Purchasing Title Insurance
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As a buyer, you can purchase your own title insurance to cover your losses. Paying the seller or lender's title insurance premium has the advantage of giving you some leverage in choosing an insurer who isn't skewed in their favor. In states where premiums aren't regulated, it may pay to shop around and compare not just price but coverage and solvency according to Fitch or A.M. Best ratings to make sure they're around in the future when you need them.
Title Insurance and Buying a Short Sale or Foreclosed Home
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Title insurance is especially important in short sales which, unlike bank-owned foreclosures, don't come with assured free and clear titles. In addition, shoddy foreclosure proceedings that emerged in 2010 could let foreclosed owners lay claim to their lost homes and was probably behind Old Republic National Title Insurance Company's October 2010 decision to not issue policies on homes foreclosed by Chase or GMAC Mortgage.
Limits to Standard Title Insurance
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Standard title insurance doesn't cover false claims or claims that may arise after the sale; for example, if you buy a newly constructed home and an electrician places a lien on the property claiming the builder didn't pay him. It also only covers the value of your property at the time the title was purchased, not any increases in its value. However, a new, slightly more expensive form of owner's title insurance, referred to as an ALTA Homeowners' Policy, covers both of these limits.
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References
- New York Times: After Foreclosure Problems, Homeowners' Eyes Move to Title Insurance
- The Mortgage Professor's Web Site: Questions About Title Insurance
- Bankrate: The Ins and Outs of Title Insurance
- Bankrate: 6 Questions To Ask About Title Insurance
- Nolo.com: Lien Definition
- Bankrate: Unpaid Liens Can Ruin a Short Sale
- Photo Credit New Home Construction 2 image by JJAVA from Fotolia.com
