Most of us got title insurance on our homes at closing, but many people (including many Realtors) do not understand what title insurance is, how it works, or what is covered.
In short, title insurance insures that you have good title to the property you just purchased, and the cost of the premium is a one-time fee, that may be paid by either the buyer or the seller at closing. The premiums are regulated by the state, and are based on the purchase price of the property.
The biggest difference between title insurance and other types of insurance is that your auto insurance insures you for the accident you have after you buy the policy. Title insurance insures only for those claims which existed at the time of closing. If you fail to pay property taxes, a contractor, or your Homeowners Association, or if you get a second mortgage, those claims won’t be covered by your title insurance.
As soon as both parties sign a contract for sale of real estate, it is sent to the title company, which will handle the closing. As part of that process, if the contract calls for title insurance, the title company will do a search of the real property records to confirm the record owner(s) and what liens are on the property, so that all of the current owners are included on any deed, and the liens can be paid off at closing. Title companies have their own copies of everything filed in the county real property records, and they have a searchable index which is more comprehensive than the county records. (For example, a title company can search by street address; the county real property records only allow searches by the Buyer (Grantee) or Seller (Grantor). It is in the interest of the title company to find ALL the title issues before closing, so that they don’t end up insuring (and paying to remove) a lien if they can avoid it.
At closing, the seller gives the buyer a deed which conveys title to the property. The deed typically has some kind of warranty, and the warranty being given is a warranty of title. So, if after closing there is a lien against the property that has not been released, that lien is a breach of the warranty of title, and the Buyer could sue the Seller to require them to remove the lien (which typically requires paying it off). However, the ability to sue doesn’t help much if the Seller has moved away to an unknown location, or does not have the financial ability to pay off the lien. So, we invented title insurance. Once you have a title insurance policy, if there are liens on the property that were created before closing, you can make a claim on the policy and the title insurance company takes whatever steps are necessary to remove the lien, instead of you needing to find and sue the Seller.
After researching the real property records, the title company will issue a Title Commitment, which sets out who the record owner is, and what liens or restrictions are of record for the property. The parties work to pay the valid liens, and remove or bond around any invalid, expired or disputed liens before closing. After closing, the title company issues their policy, which again shows the record owner (now the Buyer) and any liens which were not removed (such as the Buyer’s new mortgage). Those liens are exclusions from coverage and are not insured.
Problems can arise when a lien is created shortly before closing, but after the title company has already done their title search and identified any liens that need to be resolved. Sometimes there is a recorded lien, unpaid tax bill or interest in the property which is not resolved at closing due to an error by the closer.
If someone is claiming to have an ownership interest or lien on your property, one of the first things you’ll want to do is to review your title insurance policy to see whether it was disclosed on the policy. If not, it’s probably an insured claim. You can then contact the title insurance company and ask them to take whatever action is necessary to remove that claim.
If you run into problems or have questions, call your favorite lawyer.
