Title Insurance- what is it and why you may need it.
t's closing day. The moving van is rented, everyone's excited, nothing left to do but sign on the dotted line. As the attorney goes through the massive stack of documents, explaining each thoroughly, they pause on a particular one. As they explain the Owners Title policy, it's purpose, and it's cost you can tell most are out of their element. While attorneys are great at explaining legal documents most aren't comfortable being salesmen hence the awkwardness. The reason? Owners Title Insurance is optional and probably one of the most misunderstoodelements of a Real Estate transaction. So what is Title Insurance and why is it important?
During the initial process of your transaction soon after your contract was agreed upon by both parties, an attorney or tile company, depending on your state, was enlisted to perform a title search. The purpose of this search was to ensure the property you are purchasing was free of any liens or disputes. These might range from an unpaid contractor placing a lien on the property which prohibits it from being sold until they are paid to a previous heir's claim that during a previous sale they weren't made whole. Encroachments or mis-surveyed land lines also constitute a "cloudy" title and can present a problem. In most cases these imperfections are discovered during the tile search process but from time to time they surface after the sale and Title Insurance becomes a lenders or borrowers best friend.
First it's important to realize there are actually two "title policies". The Lenders Title Insurance policy and the Owner's Title Policy. Both designed to protect the policyholder for a title dispute.
Lender's Title Policy- this is a policy that is required by lenders to be purchased at the time of closing to protect their interest in the property. Basically the lender wants to ensure that should there ever be a claim against the property through some sort of title issue they have an instrument in place that allows them to recoup their investment.
Owner's Title Policy- in most instances this policy is optional and offered to the borrower through the closing attorney or escrow agent. I asked one of our local closing attorneys, Sharon Plunkett of Young, Wells, Williams, to expand on this policy and she responded with the following.
"Owner's Title Insurance, called an Owner's Policy, is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts for as long as you or your heirs have an interest in the property. An Owner's Policy provides assurance that your title company will stand behind you — monetarily and with legal defense if needed — if a covered title problem arises after you buy your home. Only an Owner's Policy protects the buyer should a covered title problem arise with the title that was not found during the title search. Possible hidden title problems can include:
• Errors or omissions in deeds
• Mistakes in examining records
• Undisclosed heirs
• Incorrect legal description
• Improper recording/indexing of deeds
There are many different scenarios where a Buyer needs protection from an Owner’s Policy. For instance, a previous owner may have had minor construction or repairs done on the property, but never fully paid the contractor, causing a contractor you did not hire to place a lien against your property. The previous owner may have failed to pay local or state taxes.Also, title problems occur that could not be found in the public records or are inadvertently missed in the title search process, such as spouses in the prior chain of title who are not on any of the deeds, but still have rights at common law in the property you just purchased.
Some common examples we see in our day to day practice that cause closings to be delayed or even cancelled:
1. Individual notary used instead of corporate-notary, and other defects in the?acknowledgments in the chain of title.
2. Signature dates and notary dates are not the same, or the effective date is not properly stated.
3. Breaks in the chain of title because of prior heirship issues caused by failure to properly administer or probate estate of decedent; and death of joint tenant but thedeath certificate has not filed.
4. Judgments against someone with a similar name in the prior chain of title. In Mississippi judgments are filed against a name in the county where that person resides (it affects ANY property owned by that person). If someone in the prior chain had a common name such as “John Smith” there can be dozens of judgments that the attorney has to rule out. The attorney has to pull every judgment, determine the prior owner in the chains’ social security number, and then call every person who filed the judgment and individually rule out each judgment to determine if it was the same “John Smith” who once had title to this property. This is VERY difficult to rule out after severalyears/transfers have occurred.
5. Deeds of trust/liens which were paid off in a prior closing for this Property but were not properly released. If banks close or change hands, this can be extremely difficult to have removed.
All of these scenarios can take weeks to resolve, and if you as the Owner are trying to sell or refinance your property, you may lose your interest rate lock and/or lose a buyer who doesn’t want to wait until these problems are resolved. If you have an Owner’s Policy that covers the title issue, then you can produce your Policy and proceed to close a lot faster and without the expense of paying the attorney handling your closing a fee for fixing the title issues.
An Owner's Policy provides assurance that your title company will stand behind you — monetarily and with legal defense if needed — if a covered title problem arises after you buy your home. The bottom line is that your title company will be there to help pay valid covered claims and cover the costs of defending an attack on your title. The Owner's Policy fee is a one-time fee paid at closing, and the Owner's Policy protects you for as long as you or your heirs have an interest in the property.
Common questions: How much does it cost? Like any insurance, the premium is based upon the amount of coverage, and coverage is based upon the price of the property. However, at the closing, you will receive a discount for the amount you are already paying for the Lender’s title policy, so usually it is a minor one-time fee of less than $1,000.00 and often only a few hundred.
Other questions: Doesn’t the attorney doing the closing check the title? Yes, but the attorney is only responsible for checking for certain title issues, and there are many title problems that are not revealed by checking the land records. In addition, attorneysare not responsible for errors by the recording clerks. In addition, title insurance is backed by national companies, so you don’t have to worry if the attorney doing your closing is retired,deceased or cannot be located when you discover the problem years from now upon selling or refinancing your home."
What it all boils down to? Protecting the consumer. Buying a home is the largest investment most of us will ever make. The thought that a single claim could force a homeowner into drastic situations is a scary thought. Considering the monetary investment is a one time occurrence and in most cases discounted when purchased at the time of closing it seems to be a sound investment. However, it is optional and each potential homeowner should spent time researching and making an educated decision.
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ADAM BLACK | LOAN OFFICER
100 Webster Circle, Suite 101
Madison, MS 39110