What is Title Insurance?
If you are refinancing your home or trying to purchase a new home, at some point the term Title Insurance will come up. An unbelievable number of people have no clue what title insurance is but they purchase it every day. In a nutshell, title insurance, is a policy that limits risk to the buyer, owner, and lender of a real estate transaction. The insurance may not protect all 3 financially on every deal but by eliminating risk for liability, title insurance has a positive effect for all parties involved.
At one time, if a person desired to buy a property, he would contact an attorney to research the property. The attorney would make a trip to the courthouse and pull all the necessary records to make sure that the property is clear of mortgages, tax liens, municipal liens and judgments. He would make sure that the person(s) selling the property is the actual owner(s) of record and he would also research the chain of title to make sure that the way in which the owner acquired the property doesn’t present any claims to other individuals or groups. If the person buying the property needed a loan, the attorney would assure the Bank that property was either clear or had encumbrances, meaning any liens or other property rights that may be infringed. As time went on and Banks became multi-national and it became more necessary for some type of insurance to indemnify the Banks in case there was a problem after the closing. Attorneys still comprised a good portion of title insurance in the United States. However, title companies popped up to specialize in these types of transactions. In many cases for simple residential transactions, title companies are faster and more efficient for getting through the lender’s process. Banks like Chase or Bank of America; have no idea who owns what or which attorney to use as far as ensuring them against risk in any given area. So, they let the borrower choose a title company or attorney to issue insurance to protect them.
In many ways, a lender’s policy and an owner’s policy are similar. If a person is refinancing, title insurance is purchased, at the borrower’s expense, in order to insure the new Bank that its mortgage will be in first lien position at the courthouse after the closing. At this point the Bank may request a title insurance commitment. This commitment is required for most loans as the Bank will request a Lenders’ Title Policy. A search of the courthouse records is performed by the title company and examined. In Pennsylvania, Deeds, Mortgages, liens, etc are recorded in the order they arrive at the courthouse. So, if you have an old mortgage and the bank records a new mortgage, the new mortgage will be in second lien position. In this case, the old mortgage would take precedence over the new mortgage as far as rights for foreclosing. The old Mortgage, once it is paid off, would have to be satisfied. And then, the new mortgage would move up into first position at the recorder’s office. This is the primary function of Lender’s Title Insurance on a refinance. The new Bank is making sure that if you were to ever default on your loan with them, they can foreclose on the property to get their money back. The house is collateral for the loan and they are just protecting themselves.
When you are taking ownership of a piece of real property, you want to have assurances for many different risks that are involved in that type of transaction. The first of which, is identifying the proper owner. I am sure you have heard the old “Brooklyn Bridge” line regarding suckers and real estate. Title companies verify that for you. I have had people try to throw me off of property that they not only didn’t own, but had no clue who are the actual owners. As a proposed owner, you also really need to know if there are any kinds of liens that are attached to the property. There are many types of liens but the most common are; Mortgages, Judgments, Tax Liens and Municipal liens. These types of liens attach to the property not just the owner that accrued them. So, if that owner transfers the property to you and nothing is done about these liens, you are stuck with them. You may not be financial responsible for them, but these types of liens have no regard for who actually owns the property; they are just interested in getting paid. If you get stuck with someone else’s back taxes, the tax man does not care. The government wants its money and will sell your house to get it. So, I can’t stress enough the importance of having a qualified licensed title company, examine your potential investment.
I would just like to reiterate that the potential risks that are involved with real estate are so numerous and vast, it is easy to see why most Banks and Mortgage Brokers require it and most people that are in the real estate business, realize why it is so vital to the process. It is great to have some comfort in the fact that the land has been researched and is clear for transfer. Factor in the notion that it is a onetime fee for the assurance that you are taking ownership and only have to worry about the future, not the past. And, an Owner’s Policy last as long as you and your heirs own the property, where else can you get that kind of comfort for you and your family.
by Ben Mellott