When you buy a house and take out a loan for a mortgage, part of your closing costs will include a premium for the title insurance. Whether you are a first-time homebuyer or a seasoned seller, it’s important to know what the role of title insurance plays in your real estate transaction.
What is title insurance, and what does it cover? These are two of the most common questions home buyers who need title insurance in California have. Below, we’ll explain what title insurance is, the differences between the two types of title insurance, what they cover, and why they are both critical.
What is title insurance?
When you buy real estate, the title is a document of legal evidence stating you own that specific property and have the right to use and resell it. Having a property title in your name means you legally own that property. When a real estate property is transferred, that property must be clear of any debts or liens. Everyone with the right to that property must also agree to the sale or transfer.
However, third-party claims or errors in documents might surface in the future. This is where title insurance comes in. Title insurance is a policy that protects mortgage lenders and property owners from monetary loss due to title-related issues, errors, defects, or claims that might come up later on regarding ownership of the property. Title insurance companies conduct thorough research on the real estate property being transferred. Before issuing a policy, they check to see if it’s a “clear” title free of debts, liens, or claims. However, if a title-related issue or claim arises, the title insurance company will compensate the lender or owner who suffers a financial loss. If the claim goes to a court of law, the title insurance company will help defend ownership.
Lender’s title insurance vs. owner’s title insurance
Both the lender’s title insurance and the owner’s title insurance protect against title-related issues and errors. A lender’s title insurance, also known as a lender’s policy, protects the lender or mortgage company that provided the loan during the sale of the property. This is mandatory when you are getting a mortgage loan. The lender’s title insurance covers the remaining or outstanding loan amount if third-party claims arise for the title and ownership of the party. The policy expires once the mortgage loan is paid off.
An owner’s title insurance, or owner’s policy, covers the buyer of the property. It’s usually purchased during the home-buying process, but it’s not required. This policy protects you as the new homeowner against any title-related issues, errors, or claims regarding the ownership of the property before you purchased it. It provides the homeowner with financial compensation and legal defense if the title is challenged. Like the lender’s title insurance, an owner’s title insurance is a one-time cost. However, it does not expire and covers the amount of the purchase.
What does title insurance cover?
Title defects, also known as a cloud on title, cover a broad definition of errors and issues that may come up regarding the title and ownership of real estate property. This can include errors or omissions regarding the sale of the property or those found in public records. It also covers liens, unpaid taxes or debts, unknown financial claims, forgery, invalid documents, zoning violations, boundary disputes, and other title-related errors and issues.
Unknown heirs, unknown co-owners, or missing wills
When a real estate property is transferred, all owners must agree to the sale of the property. However, there are situations when an unknown co-owner, an unknown heir, or a missing will allows a third party to claim ownership of the property. Title insurance can protect against this claim.
When a person does not pay their taxes, the local or state government can place a tax lien on their property. The lien is a means of securing the debt the person owes the government. It allows the government to collect taxes from the property owner. When the unpaid taxes and all other debts are paid, the lien is lifted.
A mechanic lien guarantees payment for services performed or materials used in the building, construction, or repairs done on a home. This can include contractor fees, subcontractors, and other stakeholders involved in the building or construction process. This is usually the first debt or lien that needs to be taken care of when a title needs to be cleared.
Forgery and Fraud
If a person forges a signature on any document pertaining to the sale and transfer of real estate property or turns in any fraudulent documents regarding the property, the title insurance will provide coverage. The coverage will compensate the lender and/or owner for financial loss. It can also help correct or defend ownership.
Legal expenses and defense
Should any covered title defects, issues, or claims arise that challenge the title, title insurance will cover legal expenses and provide legal defense. Typically, the title insurance company will hire legal representation to defend the current property owner’s title in court.
Losses and financial compensation
When a claim or challenge is made against a real estate title, and that claim or challenge succeeds, the title insurance company will provide financial compensation to the lender and/or owner up to the title policy limit. This amount may be the original purchase price or the remaining mortgage loan amount and may include additional expenses.
Contact a licensed title company