WRITTEN BY DAVID REED
Title insurance is indeed an insurance policy but is only needed when financing a home or refinancing a home loan. For the relatively few times someone can take out a home loan, the concept and utility of title insurance can be foreign to some. In addition, there is more than one type of title insurance policy. Title insurance is a form of an indemnity policy that protects lenders and buyers from a financial loss due to a deft in a title report.
Title is a public record of property ownership. If you’re a homeowner now you can look through your title policy and you will see who owned the property and when. Sometimes these records can go back a couple of hundred years. The list of buyers and sellers will be shown in the title report, all the way up to the current owner. However, there are times when ownership was transferred but not done so properly. That’s called a defect. There is also an Owner’s Policy which protects the buyer’s equity in the property. Depending upon what is customary for the area, usually it’s the sellers who pay for this policy. The Owner’s Policy is in force for as long as the owners own the home. The other type of policy is in force until the mortgage is paid off.
Okay, so let’s look at an example. Let’s say a happy couple buy their first home. They apply for a mortgage, get approved and soon the movers come. They’ve been in their house for a few months and there’s a knock on the door. They answer and it’s someone delivering a certified letter claiming they new owners don’t legally own the home, the person sending the letter does. The letter states that when the previous couple bought the home together, they later divorced. The divorce decree didn’t completely remove one of the parties from public record and that individual is still showing as an interested party.
Other issues can be other unreported problems associated with past ownership. A simple mistake in filing in public records can contribute to problems. Forgery is another when one party signs off on a sale using the other party’s signature. Maybe there’s a long lost cousin who was listed as an heir to the property and can claim ownership. In all of these, title insurance protects the lender and the new owners.
Sometimes a policy is issued that “insures around” a particular feature of the property. This can happen when it is discovered that your property is showing the fence is actually one foot into the neighbor’s. This is called an encroachment and in the event of such a scenario, title insurance can still be issued by carving out the one foot and leaving that area without title insurance. Typically, this isn’t an issue but will need to be addressed.
Title insurance, much like any other type of insurance policies, are a bit on the “dry” side and make for some rather boring reading. However, within that policy are some very important facts about the property’s history of transfer and ownership. While you may not need to read the entire policy at your settlement, you do need to be alerted when there’s a defect.