Title Insurance
Title insurance is a form of indemnity insurance that protects both the purchaser of a property and that purchaser's lender. There
are two types of title insurance: the lender's policy and the homeowner's policy. Perhaps you already know this. But the question
is, what exactly does this mean? What does it protect against, exactly?
Let's say that you're purchasing a house. Title insurance is required by the lender if you need to obtain financing. If you're the
purchaser, title insurance protects against any loss you-and consequently, your lender (the bank or other financial institution that
is giving you a mortgage)-suffer due to any problems with the quality of the title. Problems with the quality of the title can
include old debts or obligations made on that house before you owned it. Imagine the nightmare if you purchased a property, and
then a few years down the road, a couple shows up at your door and states that the previous owner had promised them the
property. Title insurance covers this type of adverse claim to your title, if you're the buyer.
Buyers who pay cash for a property may not be required to purchase title insurance (because there's no lender behind the door
wanting to protect its investment), but they should be encouraged to do so anyway for their own protection and peace of mind.
When buyers purchase a property, those buyers should be given a good and marketable title: one that says they are free to occupy
and use the property as they wish (within the bounds of the law), that the property is free and clear of all obligations and debts
(except for the mortgage the buyers obtain to purchase it, if applicable), and that the buyers can freely sell or use as collateral to
obtain a loan.
How can buyers ensure they will have a good and marketable title? By buying title insurance. The title insurance company
conducts a title search through the public records and provides the buyers with its assurance regarding the quality of the title. If
an issue arises after the title insurance is issued, the title company will reimburse the insured.
The seller must provide evidence of title (proof of ownership), and also prove that the property is owned free and clear (subject
to loan payoff, and any taxes owed, etc.). This proof, which can be shown in a chain of title is required in order to provide the
buyer with a marketable title . The seller proves such ownership through a title commitment or abstract of title , which the
buyer obtains from a title insurance company. The title commitment, which is also known as a title binder , is an agreement by a
title insurer to issue the final title insurance policy on a specific piece of property once the final settlement on the property has
occurred, and specific conditions, as named in the binder, have been satisfied.
If the buyer only receives an abstract of title (which is a summary or overview of the title history), then usually the buyer will also
retain an attorney, who will review this abstract and provide an opinion as to the soundness of the seller's title. The attorney's
opinion will also list the liens, encumbrances, easements, conditions and restrictions that appear in the public record for that
property and that impact the title. The attorney's opinion offers some insurance, but it is not a guarantee as to the condition of title.