Despite being intrinsically tied to most real estate transactions in the United States, title insurance is seldom understood by prospective home buyers. Here are five concise facts about title insurance that you should know before going to the closing table:
1 – Title Insurance is an Indemnity Contract
In essence, a title insurance policy is a legal pledge by an insurer that legal interest in a real property is properly transferred and conveyed. A title insurance policy offers coverage in case of financial loss caused by a deficiency that may strip title away from an owner or lien holder. In other words, a title insurance company provides assurance to a homeowners and mortgage lenders that they can take ownership interest in a property.
2 – An American Concept
Title insurance dates back to the 17th century; it was created after a court case dealing with a title that was erroneously cleared prior to a real estate closing. The court’s opinion determined that the title searcher made what could be considered an honest mistake, and thus could not be held liable. The first title insurance company was organized in Pennsylvania; since then, the industry has expanded to other countries such as Canada, Japan and Mexico, but the policies being issued in those nations are often backed by U.S. insurers.
3 – Lender’s and Owner’s Policies
Most homeowners who carry a mortgage pay for a lender’s policy that only protects the interest of the bank in the subject property as collateral. Without a lender’s policy, banks will not approach the closing table. Few homebuyers inquire about owner’s policies, which tend to feature reasonable premiums. Visit a business like TitleSmart if you have any questions.
4 – Proper Vesting of Interest
When the insurer issues a lender’s policy, the bank granting the mortgage gets properly vested and assigned for the purpose of creating a marketable title, which means that another bank can look at the policy down the line in case of a refinance operation. In the case of an owner’s policy, the insurer will vest buyers and their spouses in accordance to state law.
5 – Insurer’s Risk
A title insurance company will only issue a policy after thoroughly reviewing the chain of title and the property history. A single lien or title defect may prevent issuance of a policy; to this end, the insurer may issue an opinion of title indicating the defect. In the end, homebuyers and homeowners should remember that no purchase or refinance transaction can take place without a title insurance policy.
October 18, 2016