What is title insurance?
It’s an insurance policy guaranteeing that title to property is a good title insuring the policyholder against loss or damages from defects in the title.
After reading this article you will understand how to:
- Define chain of title
- Describe how a title search is conducted
- Differentiate between standard title insurance and extended coverage
Chain of Title:
Think about the life of a property and how it has had many different owners. Chain of title is a clear and unbroken chronological record of ownership of the property. It allows you to look back and see all previous owners clearly without any gaps or missing pieces.
Every owner is linked to a previous owner and the subsequent owners through deeds.
Gaps in the chain of title cause uncertainty and can “cloud the title” because ownership of the property may include the risk of someone coming forward and seizing the property from you if they truly own it. If a missing link to the title chain is found, closing should be postponed until the chain is fully restored.
When purchasing a property, the buyer expects there to be clear title, also known as marketable title. The title company and/or attorney will do research analyzing the chain of title to ensure there are no gaps. The buyer typically pays for title insurance so that if the title company or attorney makes an error while running the search, the buyer is not at a loss and gets compensated via the insurance policy.
As part of the search, the attorney can look at both the grantor index and grantee index. The grantor index starts with the government and works down the chain to the current owner. The grantee index works in reverse, starting with the current owner and working backwards until you get to the government in the chain of title.
This allows the attorney to ensure the chain matches by comparing the two and/or fill in gaps if the chains differ. When someone dies, the title can transfer without the deed being recorded so sometimes the title searcher has to analyze other records and indexes such as the probate index to find missing gaps in the chain of title.
The title search should also find and show every lien, easement, restriction, lawsuit, mortgage, and other encumbrances that have ever affected the property, even if the encumbrance has been removed or satisfied.
You’ll receive a title abstract which includes:
Certificate of Title – a document prepared by an attorney stating the attorney’s opinion of the status of the title to a piece of property after conducting research and reviewal of the title. There’s no guarantee though.
Title Report – a document only stating the current title status of a piece of property. It can show liens, pending lawsuits, current easements, and unpaid mortgages. Then the buyer and seller can work to clear these issues up prior to settlement of the sale at closing.
Affidavit of Title – a statement, sworn in front of a notary or authorized official, by the seller of property that identifies the grantor, the grantor’s marital status, and certifies that the grantor has no new judgements, liens, divorces, unrecorded deeds, or other potential title defects since the time that the title examination was completed.
In the second part of this guide we will be discussing title insurance and why you need it when buying real estate! If you have any questions, be sure to consult your real estate agent and/or local title agency. You also should have an attorney on hand to review closing documents.
Why title insurance is important:
Title insurance is important for protecting both the buyer and lender. It doesn’t cure defects in the title but insures against losses due to title defects. If necessary, the title company will be required to go to court to defend the policyholder (buyer) against any claim against the ownership of the land.
Who pays for title insurance:
Homeowner’s title insurance is usually paid for by the seller and is a one time premium that gets paid at settlement. The buyer, if borrowing money with a lender, may be required to purchase lender’s title insurance.
Homeowner’s policies are purchased in the name of the property owner and runs from the time of purchase for as long as the policyholder owns the property. When a new party purchases the property, a new policy will need to be purchased. The amount paid out is rarely the full value of the property.
The lender will have a policy drawn in its name to protect its interests in the property. Typically, the lender’s policy is for the loan amount that’s outstanding at the time the claim would be paid. A simultaneous issue occurs so the insurer isn’t paying the claim twice on the same claim to the lender and owner.
Standard title insurance covers many hidden risks such as:
- Missing or undisclosed heirs
- Mistaken legal interpretations of wills
- Deeds delivered after the death of the grantor
- Deeds by minors
- Deeds by persons of unsound mind
- Errors in land descriptions
- Oversights in searching the public records
- Rights of a spouse if a grantor claims to be unmarried, but is in fact married
Contact Kevin Foy, Realtor
Kevin is a real estate broker-associate with RE/MAX Excellence in Elkhart, Indiana and has served real estate clients for over 35+ years in Northern Indiana and Southern Michigan.
To get ahold of Kevin for real estate services:
- Phone: 574-536-9218
- Email: Kevin@TeamFoy.com
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