What is Title Insurance, and Do I Need It?
Title insurance is a form of protection that safeguards homeowners and lenders against issues or defects with the title of a property. When you purchase a property, you are essentially buying the title to that property, which is the legal right to own and use it. However, title issues can arise due to various factors, such as errors in public records, fraudulent activity, or undisclosed heirs. These issues can result in costly legal battles and even loss of ownership.
When you purchase land, you are buying an ownership interest, and you will receive ownership and the rights accompanying it in exchange for the money you pay. The person who sold you the land must have complete ownership to transfer to you. Since nobody buys property subject to a quitclaim deed, the owner made specific claims about the title.
However, the owner may not have made accurate representations to you during the sales process, or they may not even have known the threats to the title themselves. When that happens, you may face significant potential financial losses because you paid for a property you do not own. In that event, you may already have a mortgage that you must still pay, and you may be personally liable if the lender ever needs to exercise their security interest in the property. Even if you have done all the necessary homework before buying the property, you never know what surprises await you once the deal closes and you are the owner.
Title insurance can compensate you when you have suffered losses due to prior defects in title. You need it to gain peace of mind and to protect your financial interests, and you will purchase title insurance during the initial transaction to protect yourself from these losses. Then, you can file a claim against your title insurance, and the insurance company must pay for your losses.
You should always hire a real estate lawyer before any transaction to know your rights and ensure you have someone to protect them to the fullest extent possible. Your real estate lawyer can assist in clearing any outstanding liens or claims on the property, ensuring a smooth and secure transfer of ownership. They can also advise you on the best course of action if disputes over boundary lines, easements, or other title-related matters exist.
What Is a Title to Real Estate?
A title is much more than a piece of paper that says you own property. In fact, unlike a deed, it is not a piece of paper at all and is an idea about your actual ownership interest. It is confirmation that you own a piece of property once you have bought it. If you own property, you are said to “hold title” to it, and you have the rights that an owner will have that are consistent with your interests.
Clear Title Is Extremely Important When You Own Property
When you own a piece of property, you do not want there to be any competing interests. Others may claim that they own part of their land or have a right to use a portion or all of it. You need to have a clear title to the land, which means that there are no disputes, liens, or any other issues that jeopardize the ownership interest that you think you have.
If the property title is unclear, an owner will face numerous complications, especially when they try to sell it. A new buyer may not want to purchase property without a clear title, or there will be a significant impact on the value of the transaction. A buyer may be unable to line up financing for a transaction when there is no clear title because the lender cannot take the entire interest in the property as collateral for the loan.
Before a buyer completes a real estate transaction, they will need to do extensive research about the property to learn more about the title. You can learn more about the property and its title when you hire a real estate attorney to research on your behalf. They can analyze public records to know whether the title is clear and closely inspect the property to see whether there is a possibility that anyone else may be using it.
What Are Title Defects?
A defect keeps you from having a free and clear title to the property. There may be competing claims against the land from various parties, whether it is ownership of part or all of the land.
Title defects may include the following:
- Errors in public records that did not accurately state the ownership or failed to post vital documents that you needed to see
- Conflicting wills that gave someone else the right of ownership and not the person who sold you the property
- Missing heirs who had the right to own or sell the property
- Boundary disputes with a neighboring property owner who claims a part of your land
- A problem with the seller’s mental state when they transferred the deed
- Liens for unpaid debts from either lenders or the government (such as a tax lien on the property that you did not know about)
- Fraudulence during the transaction, or the seller never even owned the property in the first place
Any one of these defects can threaten your ownership of the property, and you may be unable to buy the property in the first place. The transaction with you does not extinguish the competing interests in the land that existed before you purchased it. Even though you can sue the seller for failing to make necessary disclosures before the deal closes, you may be unable to locate them, or they may not have the money to pay you.
What Is Title Insurance and How Can it Help Me?
The last thing you want is to purchase property and learn that there are issues. You may have failed to catch certain defects on the title before the completion of the transaction. Alternatively, the seller may have engaged in fraud, offering you a property that they never owned in the first place. You need protection to keep from suffering financial losses when you did not receive a title that was free and clear of defects. Title insurance offers peace of mind by ensuring you have clear and marketable property ownership.
Title insurance will cover your losses up to the policy amount when specific errors or fraud in the transaction result in defects. You will purchase title insurance on a one-time basis before the transaction closes, and its coverage continues for as long as you or your heirs own the property. Your title insurance policy will cover defects from before you bought the property (it does not cover new defects that occur after the sale).
Title insurance can help you in several ways, including:
- It helps insure your legal interest in the property that you own.
- It helps cover any losses you may suffer from a faulty title, including the cost of a real estate attorney’s fees when you need to take legal action.
- It can mitigate some of your risks when you engage in a real estate transaction.
To be clear, purchasing title insurance is not a substitute for doing extensive due diligence on the property before you complete the transaction. You should still hire a real estate attorney to research the title before the deal closes. You are always better off avoiding a problem entirely rather than having to claim an insurance policy in the event of a loss.
There are two primary types of title insurance:
- Buyers’ title insurance will protect the owner of the property and cover their losses if they learn of a defect in title later in time. You have protection if someone else files a claim against the property after you buy it, which dates back to your purchase. A typical example is when you later learn of a tax lien against the property you did not know existed at the sale.
- Lenders’ title insurance protects banks from title defects threatening their interest in the property. Since they have a security interest in the property, they will want to know that they can foreclose on it if you default on the mortgage. The property owner will also need to purchase a lender’s title insurance before they can qualify for a mortgage and buy the property.
You Should Always Purchase Title Insurance
Title defects are uncommon because upfront work can spot them before the deal closes, but you may incur significant losses. Imagine spending hundreds of thousands of dollars or more on a property you learn you do not entirely own. You may always have some worry in the back of your mind that you will learn something about the property when you already have to make mortgage payments. Title insurance can give you peace of mind and let you know you own what you should.
You may even need to purchase title insurance when you borrow money to finance a property (although you should also buy insurance when paying for a transaction in cash). The lender takes a collateral interest in the property, allowing them the right to seize it if you default on the mortgage. A lender wants to know that they can take full title to the property, so they require you to purchase insurance that can pay for losses. In nearly all cases, it is virtually impossible to get a mortgage if you did not purchase title insurance.
Filing a Title Insurance Claim
If you need to file a title insurance claim, the language of your policy will control what happens. Your title insurance policy is a binding contract between you and the insurance company, and you will need to follow the steps outlined in your policy to file a claim.
Usually, you must notify the title insurance company of your loss in writing after it occurs, and you must act promptly after learning of a defect in the title. You will submit a claim to the title insurance company, including documentation of your losses and any other information required. Then, you may need to negotiate your compensation just like any other insurance claim. Title insurance companies can deny your claim entirely, forcing you to file a lawsuit against them. Alternatively, they may make you a lower settlement offer, and you will have to negotiate for more money.
Why You Need a Real Estate Lawyer
When contemplating any real estate transaction, you must always protect your rights. Although there is an entire checklist of items you should complete before a transaction closes, contingencies that threaten the deal or your financial interests may also arise. You should have someone who can work on your behalf to help complete the required tasks before closing and deal with any contingencies that arise.
A real estate lawyer can assist you in several ways, including:
- Performing a title search before the deal closes
- Negotiating any issues that come up during the transaction, including things that you may learn through an inspection or title search
- Helping you take legal action after the deal closes if there are any defects, whether they involve title or are latent in the property (you may even rescind the transaction entirely, or you may seek monetary damages from the seller)
A real estate lawyer can also help you if you need to file a title insurance claim. You may need to negotiate compensation with the title insurance company, and it may not want to pay your claim altogether. You will have to take legal action against the title insurance company and the seller if you discover defects later and do not receive compensation for your losses.
Find a Real Estate Lawyer Near You
In the world of real estate transactions, having a trusted and experienced real estate lawyer on your side is essential. They can deal with title issues, provide advice, and safeguard your interests throughout the process. Do not take any unnecessary risks with your property’s title – enlist the help of a Dickson Legal real estate lawyer and enjoy a smooth and worry-free transaction.
