To put it as simply as possible, title insurance protects a buyer from purchasing a house that the seller doesn’t actually have the legal right to sell.
It’s relatively rare for someone to attempt to intentionally and fraudulently sell a house that they don’t own, as simply examining public records usually makes this deception clear. There are a number of common scenarios where sellers aren’t actually aware that they don’t have free and clear ownership of the house, however.
For example, they might have purchased the house in conjunction with another buyer years ago, such as a former spouse. If they are no longer in contact with that person and have not been for a long time, they may errantly believe that they do not have to be involved, but that’s not the case — if the former spouse is listed as an owner, they have to sign off on the sale of the house for it to be legal. Another situation is an inheritance in which a newer version of the will surfaces later, after the house has been sold, showing that it was not actually supposed to be bequeathed to the previous owner. If the inheritor listed in the more recent version of the will shows up to claim the house, they have a legal path to do so.
Mandatory Title Search
As a first step in obtaining title insurance, the insurance company will perform a thorough search of public records to try to spot any potential problems before they crop up. They’ll examine the chain of ownership of the house dating back to when it was built to determine if there may be any issues related to inheritance, complications from a divorce, unpaid taxes or judgments against previous property owners. They’ll also look into any unsatisfied liens against the house that may still be active.
Once this is complete, they prepare a report that’s given to both the buyer and the seller. Potential issues are highlighted, and the seller has the opportunity to rectify them where applicable. If things are bad enough, the buyer or seller may also opt to call off the sale.
What You Are Insured Against
If the title report checks out and the sale goes ahead, it is important to understand exactly what you are insured against going forward.
At minimum, the policy is going to have provisions to cover both you and your lender. The insurance pays your lender out for your mortgage payments if you lose claim to your home, and will also cover their legal costs. The policy may or may not also cover your own losses and legal fees in defending your claim to the home; lenders vary in this requirement.
So, at bare minimum, this insurance will pay off your mortgage for you (by way of a direct payment to your lender by the insurance company. If you have an additional owner’s policy, you can fully recover your losses in the event you lose the house. Without the owner’s policy, you’ll be out your down payment and any payments toward the principle that you’ve already made, however.
Fortunately, title insurance is a relatively low one-time fee (relative to the cost of the house, at least), and in some cases sellers will pick up the tab for it as part of the purchase agreement. However, if it is paid for by the seller, you should be clear on any exceptions that might be granted. Exceptions are circumstances that it may be considered unreasonable to insure against due to their unpredictability.
Generally speaking, information that cannot be obtained through a public records search is usually excepted. Easements are also almost always excepted, and it is not uncommon for rights to water or minerals to be excepted as well. Special exceptions are the ones to pay the closest attention to, as these document the most unpredictable of the possibilities.
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