TITLE is an instrument that provides evidence of lawful ownership of real property, usually in the form of a certificate of deed.
TITLE INSURANCE is written by a title company to protect property owners against loss if a title is imperfect.
Before a commitment for title insurance is issued, a search is conducted by the title company. This search is intended:
- To determine if buyers are getting all of the rights that they think they are getting.
- To show any exceptions, any other parties who have rights to the property and what those rights are.
- To determine if those selling the property have the right to do so, and those buying the property are getting all the rights to the property that they are paying for.
Because the property acts as security for the new mortgage loan, the LENDER has a stake in the quality of the title as well. Primarily, lenders are looking for assurance that the MORTGAGE lien is in FIRST position so that they will be paid before any other creditors should it be necessary to sell the property to satisfy a mortgage default or any other judgments.
TITLE INSURANCE is required by lenders to protect their interest. This is paid for by the buyer and remains in effect for as long as the loan is outstanding. The buyer may also purchase title insurance coverage to protect his own interest in the property. Owner’s coverage is not mandatory.
There are three primary areas of the title search:
CHAIN OF TITLE: A history of ownership of the property – who bought it, who sold it and when (not shown specifically on the title report).
TAX SEARCH: Present status of real estate taxes against the property. Are taxes current? Are there any taxes past due or unpaid from previous years?
SPECIAL ASSESSMENT: The Tax Search also will disclose any special assessments against the property and their status.
Tax assessment liens have PRIORITY above all other claims on the property, and as such, the property can be put up for sale by the appropriate government body in order to pay any monies owed. A title search should reveal the status of such liens. Title Insurance protects the buyer against any loss due to unpaid or past due taxes or assessments.
POSSESSION: If the home is newly constructed, is a high-end priced property, or if the title company anticipates a problem, they may send out an inspector to check such things as location of improvements, evidence of any easements that are not shown of record or other red-light indicators.
JUDGMENTS: The title search also will determine if there are unsatisfied judgments against the seller or previous owners. Judgments are general liens against a debtor’s property, and the property can be sold to satisfy the judgment. It is very important that the property is not subject to any judgments. Title insurance protects the lender and the buyer if he chooses to purchase a policy.
NAME SEARCH: A search of all spelling variations of a name to protect the buyer from claims against the property by persons of the same name. A signed identity affidavit may be required if name similarity problems occur.
Judgments, unpaid taxes, and mechanics’ liens all may be prior claims against the property. If these are discovered, there would be a defect or cloud on the title. The seller must then remove any defect before clear title can be issued to the new buyer.
There are many other hidden risks covered by title insurance. These are not of public record and may include:
- Incorrect marital status of owner
- Undisclosed heirs
- Mental incompetence, minor legal status
- Fraud and forgery
- Defective deeds
- Errors in records or clerical work
When these searches are complete, the title company will issue a commitment to insure, stating the conditions under which it will insure the title. If defects are found, the buyer, seller and lender must clear them before they proceed with the closing of the transaction.