Protect Your Property with Title Insurance: A Complete Guide for Homebuyers and Homeowners
Here we discuss the basics about “What is Title Insurance”
A brief history of what title insurance is will help you better understand why we have it now.
Check out the Torrens System of Title. It’s a different system that what is used in the United States and arguably the better system.
Have a look at the ins and outs of the title process with this breakdown and explanation.
- The Title Insurance Process
- 1. Request Comes in for Title Insurance
- 2. Title Search
- Abstract of Title – Meaning
- 3. Title Examination
- 4. Title Commitment
- Breaking down Title Commitment
- Schedule A
- Schedule B
- Schedule C
- Schedule D
- 5. Curative Process
- 6. Closing / Premium Payment
- 7. Policy Issued and Delivered
The most common question in Title “Why do I need Title Insurance?”
Here are the different types of policies you will see for Title Insurance.
It’s important to know your rights, when it comes to title.
The Second asked question about title insurance, “How much does title insurance cost?”
Some final thoughts to wrap-up the blog.
Everything You Need To Know About Title Insurance
So what is Title Insurance? Title insurance protects you from incurring a financial loss associated with defects in real estate title and facing other negative consequences often triggered by various issues that could come with transferring ownership of title.
What is Title Insurance?
In the US and Canada, title companies offer this insurance in order to protect the insured from incurring a financial loss associated with title defects. The insurance also protects lenders from unenforceable mortgage loans due to issues with title.
A title company will run a deep search through various public records in order to detect any issues or complications with the ownership of the property when you buy title insurance. The company will also look at tax, deed, and court records.
We can define title insurance as a specific type of insurance. Title insurance is a type of indemnity insurance. Note that indemnity insurance is a formal contract where one party to the contract guarantees compensation or damage for any real or potential loss or damage incurred by another party.
You pay a one-time fee at closing to the title company in order to protect the buyer or lender from any claim against the title. In most cases, US states recorders of deeds do not guarantee indefeasible title to all recorded titles. Keep in mind that this is unlike many land registration systems in countries other than the US. In the US, a private company (also known as a title company) steps in and functions as the title insurer to protect the relevant parties in the transaction. A lender’s insurance policy covers the lender up to the loan amount in case any problems that can creep up with the home’s title subsequent to financing.
Companies, for example, often issue an owner’s policy, for the purchase price of the home. Keep in mind that it covers a wide range of issues that may arise. These issues include tax liens, deed omissions or errors, forgery of deed documents, mistakes, and fraud in the public record. In addition, it covers you if any prior owners’ unknown heirs show up and make their claim on the property.
Title Insurance – A Brief History
It is no secret that buying real estate in the US was risk-prone before the existence of title insurance. This is because people bought and sold real property without any type of guarantee or insurance.
In other words, people executed the transaction and hoped for the best outcome. Men, known as conveyancers, handled early land transactions in US history. During real estate transactions in the country, conveyancers established the rights of title to properties, mainly based on searches of public records and by reviewing all previous ownership records, as well as liens, encumbrances, and judgments relating to the property.
Keep in mind that these conveyancers did not practice law. However, they remained authorities on real estate or property law. It is also worth noting that conveyancers took care of all aspects of the property transaction, including drafting contracts and performing a title search. The British colonists instituted this system. After doing their research, conveyancers produced a signed description or an abstract of the title status to let the parties know whether the title was unencumbered and good, and they could proceed.
However, conveyancers could provide little protection for defective title, which was concerning for buyers. In order to guarantee title, all they could offer was their skills in searching title but nothing more. People paid them a sum of money in the hope that they would do quality work. However, they gave little assurance to property buyers that the title to the property was good.
The main issue that people faced is liens and encumbrances on the property title before conveying the real property to new buyers. This is why there was a high risk of losing a property because of unresolved issues. This was the consequence of no insurance backing the property title and was troubling for people who engaged in property transactions.
There was a time when the phrase “buyer beware” was one of the watchwords in the US real estate industry. As the name suggests, buyers were responsible for researching the validity or authenticity of the property seller’s purported title. While these people had the right to hire specialists in researching records, they had little assurance that the title was clean and free of liens.
The aggrieved lender or borrower would have to establish legal negligence in case of an unresolved issue that caused problems or complications. And that was the only way to collect damages from the conveyancers for their errors or lapse of judgment. Note that recovering damages was almost impossible in these cases, which aggravated the problems. You can imagine how frustrating it could be to buy a property and then losing that property at an event like a tax auction because the property had a lien on it. And all of this happened even when you took the steps you were supposed to take to protect yourself.
This is what transpired in a famous case in 1868:
Watson v. Muirhead
In the above case, Watson purchased a piece of land using Muirhead as the conveyancer. Upon his research, Muirhead uncovered a recorded lien on the property title. As a result, Muirhead discussed this issue with an attorney. However, the attorney informed Muirhead that the lien on the property wasn’t valid, and the title was clean. Muirhead dismissed the title defects and lien and didn’t even tell Mr. Watson about the lien, certifying the title unencumbered and good.
Watson executed the sale transaction based on this assessment. Unfortunately, he soon realized that his property was being disposed of at the Sherriff’s auction to pay for the property lien Muirhead had seen. As a result, Watson sued Muirhead for a sum of $1,400.
In its ruling, the Pennsylvania Supreme Court stated that the property lien was actually lawful, and that the Sherriff’s sale remained legal as well. The conveyancer(Muirhead) in this real estate transaction wasn’t held liable by the court for misinformation. This is because the legal standard, in this case, was “negligence,” or not acting with due care. The court deemed that the conveyancer had used due care as he had relied on the opinion of an attorney that the lien on the property was invalid.
They auctioned off the property for no fault of the buyer, even though the conveyancer had taken all the right steps. As a result, Watson incurred a loss of $1,400 for no personal fault; it was rather a bad circumstance.
For anyone buying real estate in the US, this was an unsettling and worrying outcome. Because of this ruling, anyone conducting a real estate transaction was susceptible to a high level of risk from circumstances and situations that were not controllable. It also increased the risk of losing your entire investment, which was very scary.
In light of this ruling, the Pennsylvania legislature, in 1874, passed a bill that legalized the formation of title insurance companies in the country. This triggered a group of conveyancers, including Joshua Morris, to come up with an effective way to protect the innocent purchasers of real property in the US.
The first title insurance company came about in Philadelphia In 1876. The company’s mission was to protect real estate buyers and lenders against any losses arising from liens, defective titles, and encumbrances. The company offered the same services to people as conveyancers did; however, they also provided title insurance. The insurance protected the lender and buyer against any claims that may arise in the future against the title.
With this new kind of insurance, title companies provided the following:
- Financial protection and security by lowering the risk of insolvency
- Responsibility without establishing proof of negligence
- The assumption of various risks in addition to those disclosed or mentioned in the public records (conveyancers were not liable for these risks)
Buyers were relieved, as this allowed them to have some peace of mind knowing their investment in the real estate would be safe at all times and no one was going to do something like auction off the property like in our example above. The Real Estate Title Insurance Company of Philadelphia was the first to issue title insurance policy to Morris’ aunt for a sum of $1,500, and it covered a home in Philadelphia. Title insurance companies soon started to pop up in other large metropolitan areas throughout the US, such as New York City, Minneapolis, Chicago, and San Francisco, among others.
Title companies work hard to locate, eliminate, and prevent any losses or risks, which might arise because of title problems in the US. They use public records in order to establish a clear chain of property ownership and disclose all identifiable outstanding claims against a property so buyers can have peace of mind.
The Torrens System
In the 1850s, the Torrens certificate originated in Australia. Sir Robert Torrens, who, looking to simplify and streamline land sales, created a new system in which a title certificate would bestow ownership on its holder. People bought real estate using a deed of conveyance before Torrens, just like in the US.
It is worth noting that the transition to the Torrens System relieved both sellers and buyers of examining long and complicated deeds as well as dealing with homeowners who may withhold or even lose their deeds. Each state would establish a land registry under the new system rather than performing a title search for the chain of title.
Keep in mind that each piece of land in the registry is identified by a unique title and number kept at a government office. Each title also has a description containing the exact dimensions of the land as well as its boundaries. Instead of the solicitor or conveyancer who made the deeds of conveyance, the state government would guarantee the title’s validity.
Remember that a title indicates the names of the property’s registered owners as well as any legal interests applied against the property title that consequently affect ownership. The registry is also open to the general public and anyone can access the information. In 1858, the bill became the Real Property Act (SA).
The system became popular and spread throughout Australia. During the late nineteenth and early twentieth centuries, the recording of deeds was comparatively less centralized and automated than today. All areas or Australia now have title offices or a land registry and use the term ‘Torrens Title.’ This is despite different jurisdictions.
The Torrens Title certificate shows the following:
- The current property owners
- Property covenants, like any building restrictions
- Easements, like and ‘right of carriageway’ for neighbors to get access to their property
- Caveats and conditions, like a requirement for a person’s approval before the transfer of ownership
The Torrens system functions on three principles:
The Register of land titles completely and accurately reflects the current ownership as well as interests, such as a mortgage, about a person’s land.
The Land Titles Register has all the relevant information about the person’s land. This means that ownership, as well as other interests, don’t require long and complicated documents, like title deeds, for proof.
The government guarantee offers compensation to any person who suffers the loss of land by private fraud.
Some US States tried to adopt the Torrens system of title in the late 1800’s. The first state that adopted a Torrens Title Act was the state of Illinois. Keep in mind that the state used a limited Torrens system after the Great Chicago Fire in Cook County. Other states in the US implemented the system on a limited basis. These states include Virginia, Minnesota, Massachusetts, Georgia, Colorado, Hawaii, North Carolina, New York, Ohio, and Washington. As many states in the country had limited implementation, many counties had the option to withdraw from this program, and this proved to be a limitation in keeping Torrens as a functioning system.
The US adopted the Torrens system slowly because of the way the judicial process worked in the country. The deed system, on the other hand, had gained a lot of popularity quickly and the advocates of this system were able to squash out any competing systems like this Torrens Title System. By the 1930’s the Torrens system was prevented from expanding and almost entirely fractured in the US.
The Title Insurance Process
Do you want to know the process to ensure that your property’s title is clear and free from liens and encumbrances and how to get a title insurance policy? The title insurance process in the US follows these seven steps.
1. Request Comes in for Title Insurance
Usually, the buyer or buyer’s attorney (or in cases of a refinance, the lender) will place an order for title insurance with a title company. The title company initiates multiple searches needed to tell the complete story of the current state of that property’s title
2. Title Search
The chosen title insurance company will then perform an exhaustive search of the historical records pertaining to the property that a buyer is purchasing. Title search usually includes a search of the county public records for any judgments against all of the individual parties to the property transaction or any problems with the chain of title.
It also includes tax searches and any searches needed to satisfy the requirements of a specific county, municipality, or state. Records are accessible online as well as the county courthouse. The title agent receives the full title abstracts with the copies of all the relevant documents and records.
Abstract of Title – Meaning
We can define Abstract of Title as the summarized and comprehensive history of all of the titles, legal actions, and transfers that are associated with a property.
The abstract of title is a document that summarizes the history of a specific piece of property, including transitions of title and legal activity. In most cases, an abstract of title for a property starts with the initial grant deed. It also includes all of the later changes in property ownership and any additional claims, including encroachments, easements, encumbrances, litigation, liens, restrictions, and tax sales.
As you can imagine, an abstract of title is a crucial document to have prepared and to read and understand before purchasing a property.
3. Title Examination
A title examination is among the most crucial aspects of any real estate transaction and is often essential to a successful transaction when buying real estate. It is a careful examination of all public records that can affect the title to the property you are buying. The process often looks for encumbrances and liens on the property, which might not make it suitable for sale. During the search, past deeds, trusts and wills undergo review to ensure the title has adequately passed to each new owner.
Note that the title examination will assess whether ownership of the relevant property can be linked to anyone other than the seller and buyer when reviewing the chain of title. The chain of title is the detailed history of the passing of property title ownership from the present owner to the original owner.
A civil law notary or registry office may maintain a record of title documents. A defective title is a title to real property that is not valid because a claimed past holder of the property title didn’t have a title. It can also be because there’s an inaccurate description of the property.
A purchaser will usually research a chain of title in order to avoid a defective title problem. The chain of the title often include the following:
- Notations of deeds
- Certificates of the death of a joint tenant
- Judgments of distribution from estates
- Judgments of a quiet title
The title examination often takes place while a property is under contract so that any concerns or issues that arise during the process may be addressed, or the purchaser may decide to withdraw from the property transaction.
4. Title Commitment
A title commitment is a legal document that explains the details surrounding the relevant property. The document lists the various requirements, exceptions, and exclusions, behind issuing title insurance on the property.
The title officer will issue a title commitment. This is issued on behalf of the title insurer. The buyer knows very little about the property’s potential peculiarities without a title commitment, and this is why the document is so important. The title commitment is a binding agreement between the title insurer and either the lender or buyer to insure title on the terms. The commitment will specify various things, such as the amount of insurance and the insured parties. It also specifies exceptions and requirements that have to be met to issue the policy.
Breaking down Title Commitment
The title commitment is often divided into four sections. Keep in mind that the title commitment may vary slightly depending on the US state in which the property is located; however, they always have the following parts.
Schedule A of the commitment outlines all the details, such as the date and amount, of the transaction.
This section mentions the types of policies that will be issued (Lender’s Title Policy or Owner’s Title Policy and).
For buyers, this section mentions the types of interest they will acquire in the property. It should be “Fee Simple” in most cases. This type of property is owned completely, without any conditions or limitations.
After a search of the property records Section 3 reveals the legal owner of the property. Both the listing agents and selling should review it to ensure that the names mentioned here match the seller on the contract.
The names might not match for several reasons, such as the following:
- A death
- Marriages since the acquisition of the property
This section of Schedule A reveals the legal description.
Schedule B mentions the requirements, exclusions, and exceptions. Schedule B is one of the most important parts of the title commitment. And this is why buyers should pay close attention to this schedule. We can define an exception as something that is not covered in the title policy. It is worth noting that Schedule B contains both standard exceptions as well as property-specific exceptions. Note that a “standard exception” includes promulgated language from the Department of Insurance. Remember that you can find these exceptions to coverage in every owner’s or lender’s title policy. Also, these exceptions don’t change. A specific exception, on the other hand, is one that affects the real estate to be insured.
The following things can be covered by specific exceptions:
- Mineral severances
- Setback requirements
We can think of Schedule C as the “Clear to Close” schedule. This is because of the fact that the items listed in this section have to be addressed before or at closing for any title company in the US to fund and issue its policies. These are called requirements.
The following items are in this schedule:
- Mortgage to be paid off at closing
- Labor liens
- Abstract of judgments
- Unpaid taxes liens, and
- Home improvement liens
Keep in mind that Schedule C is also crucial as it lists any requirements that you have to satisfy to get to closing, making it important to both buyers and sellers. This is because it itemizes what conditions have to be satisfied before property closing can occur.
If you are a seller, you have to pay special attention to the schedule. This is because it is the checklist of tasks for you to close in a timely manner. Remember that many “simple” matters can be easily resolved by tasks that a closing team manages through the home closing process.
The primary purpose of this schedule is to disclose information. The schedule will mention the parties to the transaction that has a share in the title premiums, and this includes title agents and underwriters.
5. Curative Process
Title curative is a group of procedures that are used to “cure” defects or issues in chains of title, like correcting instruments, which are either erroneous or ambiguous. Did you know that one in three properties have some type of issue with the title? This process is focused on whether or not the actual possession and use of the land under review is fully consistent with and complies with record title. Keep in mind that the title agent works in order to clear any “clouds” to the title. We can define a cloud on the title as any irregularity or inconsistency in the chain of title of the real property that can give a reasonable individual pause before they accept a conveyance of title.
In some circumstances, note that these clouds might be resolved in just a few hours. On the other hand, the process may end up taking weeks or even a few months if legal action needs to be taken. If there is, for example, an open judgment on the relevant property, the title officer will contact the parties involved in order to get the judgment paid, clearing the title in the process.
Here are some common issues that may cause a loss of title or can create an encumbrance on title:
- Forged deed and wills
- Impersonation of the real owner of the property
- Missing or undisclosed heirs
- Instruments executed under an expired or invalid power of attorney
- Mistakes or errors in recording various legal documents
- Deeds executed by minors and persons of unsound mind
- The person signing the deed does not have the authority to do so. This often occurs when the seller is a partnership, a corporation, or an LLC.
This is where the role of the title officer is important. He works with sellers, buyers, lenders, and their attorneys in order to resolve the complex and varied title issues, which can come up during the search and title examination process.
6. Closing / Premium Payment
Your title insurance is paid in a single premium. As a result, you do not need to worry about making payments on a monthly basis. You will have to pay the premium at the closing table. The buyer/seller will cover the insurance premium, and the policy will guarantee them for lifetime ownership.
7. Policy Issued and Delivered
The title agency will issue the actual title policy after the closing on behalf of the title insurer once the new deed is recorded after closing.
Why you need Title Insurance?
A title defect that comes to light after a loan closing could, at a minimum, mean various legal costs — and, in some cases, the loss of your property.
Title insurance protects you against:
- Financial liens against the property
- Loss because of title defects and other similar matters
- Unpaid taxes or assessments
- Fraud or forgeries in the chain of title
- Claims of ownership made by other parties
- Losses from problems or issues that arose before you purchased the property
- Right-of-way issues and easements that may harm the property owner financially
- The title company will also defend you in court in case there’s a claim from another party against your property, and will also pay for covered losses
Types of Policies
There are two standard forms of title insurance. One is for owners, and the other is for lenders.
Note that an owner’s title insurance fully protects the buyer if a problem surfaces with the title that wasn’t uncovered during a title search. Also, it pays for legal costs that a buyer incurs in defending a claim against their title to the property. You can buy it for a one-time fee at closing, and it lasts for as long as you retain an interest in that property. An owner’s insurance policy can protect the full value of your property, including your equity, for just a couple hundred dollars.
Lender’s title insurance policy is one of the main requirements in most US states to close on a mortgage. However, keep in mind that the lender’s policy only protects the lender, and this protection is up to the amount of the mortgage.
The lender’s policy will cover the following:
- Unrecorded liens and mechanic’s liens
- Unrecorded access rights and easements
- Defects and various other unrecorded documents
Lender’s title insurance will not protect the buyer’s investment in the home (or your equity). So, a lender’s policy will insure the priority of the lender’s security interest.
Your Right to Choose a Title Insurance Company
The RESPA (Real Estate Settlement Procedures Act) gives you the right to choose a title insurance company when you are buying or refinancing residential property. According to RESPA, it is unlawful for any broker, bank, or attorney to compel you to choose a particular title insurance company. Similarly, Section 9 of this act prohibits a seller from forcing you to use a specific title insurance company, either indirectly or directly, as a condition of sale.
Title Insurance- Cost
Similar to the rates for other types of insurance in the country, state governments regulate the rates for title insurance. This is done to ensure that premiums aren’t excessive, unfairly discriminatory, or inadequate for the public. There are two parts of title insurance. These are premium charges and service fees. The method varies by state, so review your particular states title cost policy. In Texas for example, the premium charge is governed by the Texas Department of Insurance set rates and dictated by the property sales price or loan amount. The service fee(escrow & settlement fee) is the only rate the title company has the ability to change.
States regulate title insurance rates using different methods. The various types of rate regulation used by various states include the following:
Promulgation: These rates are set by state regulatory bodies.
Prior approval: In this case, insurers propose the premium rates, and the regulatory bodies review them formally and then approve them explicitly before they are charged.
File and use: In this case, insurers set the premium rates; however, you cannot be charged until a party notifies the regulator.
Use and file: In this case, insurers set rates, and they can charge the rates immediately, provided they have filed the new rate schedule with the regulatory body.
No direct rate regulation:
In this case, insurers set the rates at their own discretion. A regulatory body will still oversee the title insurance industry in this situation and has the right to question the propriety of the premium rates if they are unfairly discriminatory.
Title insurance is excellent protection, especially for homebuyers in the US, since this group can find it hard to detect the problem before it arises. We hope you now understand what title insurance is and why you need it. Title insurance policies can protect you against human errors that could derail a sale or cause a person to challenge ownership.