Real estate transactions have a way of creating a lot of paperwork and over time, that paperwork can really start to add up. It's not possible in all cases to keep accurate count on how many times a piece of property has changed hands; if you live in an older part of a city that has been established for generations, the title to your property may go back generations and the land even further than that.
Think of the changing of title in real estate as one long chain. As with any long chain, there are numerous points along the way where there may be weak spots. In the case of real estate, though, a weak spot won't lead to a broken chain, it will lead to a lot of legal work. This legal work will often mean large fees for the defendant (usually the current title owner) as well as possible damages paid out.
These weak links in the real estate title chain occur when something in the past happened to cast doubt upon the true ownership of the title. The current holder of the property may not even have been alive (her grandparents may not have even been alive!) when the defect in question occurred, yet it will be the current owner who is paying the fees to defend her title.
Title insurance is a way of insuring that the fees for research, settlement, and legal fees are paid not by the current title holder but by the insurance company. It is a very handy thing to have when there is a dispute because researching that kind of claim can take years and a lot of hours put in, and usually a claimant is not after the property but after a dollar amount on the current worth.
With that said, it's easy to see why people would want to have title insurance, but does everyone actually need it? Well, statistics certainly don't support it. Title insurance companies have the best return for their shareholders of any of the insurance specialists, spending only about 4.5% of their total premium contributions in actual claims. That's a very, very low figure, one that indicates that title issues do not spring up very often. However, it is worth the price of title insurance if one holds title in a country such as the United States, which uses a documentation, rather than a registration, system for title holders, a system which has several inherent flaws.
If you hold title on land in parts of the industrialized world other than the United States, you are even less likely to need title insurance. Still, if the land or property that you are purchasing does come with a chance of contestation (in Canada land claimed by various native groups is a good example) then you might want to consider taking out a title insurance policy.
Tucked in among all your other closing costs when you buy a house you’ll probably find a charge for “title insurance". If you’re taking out a mortgage to buy a house, your lender will insist that you take out title insurance. This is more than just one more nuisance charge levied by people who are determined to make a few extra bucks on your home purchase. Title insurance offers you some real, tangible security in the event that there’s ever a problem with the title to your home.
But I thought that’s what the title search was for… When you agree to buy a house, you want to be sure that the person selling it to you actually has the legal right sell it. The information about who has rights of ownership to a piece of property may be scattered in all sorts of different places. The way that you find out who can buy and sell the property is to hire an experienced researcher who understands all the things that can affect the transfer of a title from one owner to the next.
Because the information is so scattered, though, there is always the chance that some little bit of information might not be recorded or found.
Really, though, what could go wrong with a title? Let’s just say, you’d be amazed. We’ve heard stories that range from the bigamist’s first wife having a claim on the house to the fast-talking con artist who forged ID papers and sold a family’s home while they were on vacation. Most title disputes have far more boring causes – an old homeowner’s loan that wasn’t paid off, a clerk’s mistake in filing a document or a dispute arising from a mismarked property line.
So what does title insurance cover? When you take out title insurance, the insuring company will do a full search of the title records to be sure that they are free and clear, but there’s always the possibility that they missed something. If they did, they promise to pay any costs arising from the title challenge and to reimburse you for any losses you incur because of it. In other words, if someone does show up with a claim against your deed, the insurance company will pay the legal costs of defending against the claim. If you lose, they will pay off the cost of the house.
Okay, so what’s with the “lenders insurance" and “buyers insurance"? There are two kinds of title insurance. Mortgage lenders require only that you buy “lenders insurance" because they’re looking out for THEIR interests, not yours. In the event that a successful claim is made against your ownership of your house, lenders insurance will pay them any money outstanding on your mortgage. You, however, are out any money that you’ve already paid on the house, including your down payments.
Owners insurance covers the entire purchase price of the house. If there is a claim against the property, the insurance company will reimburse you any money that you’ve already paid toward your mortgage and pay off the remainder of the mortgage so that you’re not liable for continuing to make the payments on a house that you don’t own.
How do I pay for title insurance? You’ll pay for title insurance as part of the closing costs of your house. It’s a one time premium that will cover you for as long as you own your home, as long as the claim arises from something that happened before the title search was done. There are no monthly payments – pay once, and you don’t have to worry about it again.
Both Rob Parker & Calum Mackenzie are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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