Title insurance is perhaps one of the most confusing concepts in real estate to the average home buyer. It seems so mysterious and expensive, but nobody can truly explain why it’s needed or how it works. So, here’s a guide that explains title insurance and the reasons why it’s important.
1. To Ensure That Title Has Passed Properly
The person selling you the home is transferring only those rights he or she possesses to you. For example, if a man and woman own a house together as “joint tenants with right of survivorship,” and the man decides to sell his half to you, he really has no more legal standing in regards to that property. The same is true if a person inherits property but doesn’t actually own it. In order to make sure you get what you pay for, title insurance ensures that the title has been transferred properly from the original owner. This is one of the primary services offered by a title company that is reputable. It provides coverage up to the purchase price of your home by guaranteeing you that you have not only a clear title but also insures that there are no liens against the property, which means you haven’t inherited someone else’s debts on top of your new home. This insurance also lets you know that the title is free and clear of any legal issues or problems, meaning it hasn’t been contested or otherwise legally challenged.
2. To Protect You Against Fraudulent Conveyance
Sometimes shifty real estate agents play fast-and-loose with the truth when describing properties for sale, which can lead to issues later. For instance, an agent might not disclose that the house you’re buying was once a drug den or had a murder-suicide committed in it. Or worse, someone could try to pass off their property as something else – like trying to sell you farmland as residential real estate – and title insurance ensures nobody can pull this underhanded tactic on you.
First, a title insurance company will research the property history, paying attention to anything of significance – such as whether or not the home was once owned by someone who might have been involved in illegal activity. Once they determine that it’s clean and has no problems on record, an inspector will walk through it one last time. If everything looks good, the title company will issue a policy, which you’ll get in the mail.
3. To Cover Your Legal Expenses If Too Many Problems Arise
Even though you don’t know it now, there’s the possibility that problems could arise. For instance, a construction company might decide to challenge your claim on the house because they claim they have a stake in it – maybe they built a fence or some other structure without first getting permission from the owner. Sometimes neighbours will contest a sale if they feel their property line is located somewhere other than where it should be. Whatever the case, you’ll need to hire an attorney to help you navigate the legal waters. The title company will pay these expenses up to your policy’s limit. This safeguard protects your investment by allowing you the time and money necessary to fight any claims that could affect your ownership of the property.
To illustrate, let’s say you buy a house for $250,000.00. After the closing, your neighbour comes over and dumps sand all across your side of the yard – almost to the point where it’s impassable. You don’t know why they did this, but since it happened after your purchase of the property, there’s not much you can do about it. One way or another, you’ll have to cement the border back where it belongs – and then you must go through legal steps to recoup your expenses from the neighbour. This is why title insurance exists: It allows you to take care of all this without having to worry too much about the cost because everything’s covered up to a set sum.
4. To Ensure Your Lender Is Covered
The last thing you want is to be out of pocket when something goes wrong, and this is where title insurance for lenders comes in. If your lender requires coverage, they’ll make sure you have it before the transaction closes. This policy protects them against issues like if they uncover any liens against the property after you’ve purchased it from the owner.
To illustrate, let’s imagine you purchase a house for $200,000.00 with a 20% downpayment of $40,000.00 – or in other words, your lender holds a mortgage for 80% of the property’s value. Later on, someone comes forward saying they’ve mortgaged it to another company (or individual) for more than what you’re paying, and they want their money ASAP. In this case, your lender could be in a bind because the property might not be worth what’s owed to them. That’s why the lender will require title insurance: It allows them to recoup any losses in a concrete way, which protects you from having to fork over a huge sum if the banks are forced to foreclose.
5. What Happens If You Sell Your Property?
Once you’re ready to part ways with your property, the title company will research the potential new owners. The process for this is- they’ll look into how much money each party involved has, any possible liens or lawsuits that might arise, etc. After everything is cleared, the company will issue a new title policy. In some cases, you may be able to transfer your existing policy from one house to another – it all depends on the company and whether or not they’ll accept what’s already been issued.
To illustrate, say you bought a house for $200,000.00 and then sold it after owning it for 10 years when the market took off. Once everything was mutually agreed upon – i.e., price, terms of sale, etc – your realtor would handle the situation with their title company because they deal in these types of transactions all the time. The new owner would have to have their own separate policy, but it can be transferred over if the title company allows it. This is why you need the right realtor on your side before you ever sign an agreement or put down a payment – because they know what’s best for your interests as a seller.
In closing, title insurance is for the protection of your interests in property and pays for necessary legal fees should any problems arise later on after the sale. It’s important and something you should look into before committing to buy a home.
