Q: What is title insurance?
A: It's protection against loss if a covered defect is found in your title. When you buy a home, you are given a title to the property, which generally means you receive full legal ownership. But, sometimes there's a hidden mistake in a prior deed, will, mortgage, etc., that may give someone else a valid legal claim against your property.
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Q: Why is title insurance important?
A: Because it provides a "safety fence" around your property. Having title insurance can save you money, time, trouble, even your home.
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Q: Who is covered by title insurance?
A: The lender - when you buy property, you are commonly required to buy title insurance. This covers the outstanding balance on the mortgage for the lender, but does not protect you.
The buyer - when acquiring property, it's a good idea to get your own title insurance policy. It will give you peace of mind and maximum protection in case there's a claim against your home.
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Q: What risks are covered?
A: That depends on your policy. Coverage typically protects against four "hidden risks."
- Errors - incorrect information in deeds, mortgages, public records, etc., such as wrong names.
- Liens - claims against the property or the seller that beome the new owner's responsibility after the sale. Examples are unpaid mortgages, taxes, sewer and water assessments, bills owed to workers or other creditors, etc.
- Claims to ownership - as an example, a claim to "marital interest" by the spouse of a former owner or by a child of a former owner who was not mentioned in his or her parents' wills.
- Invalid deeds - transfer by a previous seller who did not actually own the property, or by a previous owner who was not mentally competent.
Many of these problems might not be discovered in a routine title search.
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Q: Are there any exceptions to what title insurance covers?
A: These risks may not be covered by your title insurance policy.
Standard exclusions often appear as part of the printed form. For example:
- limitations on land use, such as laws against farm animals.
- mechanics' liens, such as unpaid construction or repair bills.
Exceptions may also be written into your specific policy, based on defects found in the title search. For example:
- easements, rights of way, and other legal obligations noted in the deed or in the public records.
- "restrictive covenants," agreements limiting certain types of use of your property.
Your insurance company may remove some exceptions if you request it.
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Q: What is a title search?
A: It's the first step in obtaining title insurance. A title search is a detailed examination of the historical records concerning the property. These include deeds, civil and probate court records, tax records, etc.
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Q: What is the purpose of a title search?
A: To verify the seller's right to transfer ownership and to discover any claims, errors, assessments, debts or other burdens or restrictions on the property. A title search is carried out by a lawyer, abstractor or a title insurance company.
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Q: What is an abstract?
A: In some cases, the title searcher prepares an abstract, which is a condensed legal history of all transactions affecting the property.
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Q: What is a binder, also known as a Commitment to Insure?
A: Based on the results of the title search, the title insurance company usually issues this until the title insurance policy is issued. It will include a details about the property, it's location and the buyer information. It also includes the following:
- a summary of the condition of the title, including title defects, liens, etc.
- conditions to be met in order to insure the proposed transaction.
- an agreement to issue a title insurance policy upon payment of the premium.
The lender receives a copy of the binder to use until the policy is issued at the closing. The buyer should arrange to get a copy so they can meet all conditions before the closing.
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Q: What happens at the closing?
A: Ownership of the property is transferred. Title insurance is issued, and coverage begins. Those present at the closing may include you, the seller, the bank's agent, and agents representing you and/or the seller.
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Q: What are the costs associated with the closing?
A: Closing costs usually add up to 6% or more of the purchase price. Depending on state and local laws, you may have to pay:
- title costs - fees for the title search and the lender's title insurance. Your own title insurance is an additional fee.
- settlement fees - fees for the lender's agent (usually a lawyer or a title or escrow company representative). You may want your own lawyer in addition.
- loan charges - including origination, appraisal and survey fees.
- taxes and government fees - transfer taxes, buyer's share of yearly property taxes.
Before you close, review the HUD-1 Settlement Statement, which provides an itemized list of all closing costs. Be sure you understand them. Before you leave the closing, make sure you check your title insurance policy and all other documents for the following:
- names should be listed, spelled correctly.
- description of the property should be accurate, legally correct, and up-to-date.
- figures should be correct, as previously agreed.
This is your chance to verify fees, check procedures and terms and ask any questions.
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Q: How much does title insurance cost?
A: You pay a one-time premium. Costs vary from state to state. Check with your lender, attorney or title company for costs in your area. In some areas, title insurance costs are shared by buyer and seller.
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