Anyone
who has ever purchased a home or other real estate—especially if that purchase
was made with mortgage financing—has seen an item on the Closing Statement entitled
“title insurance.” Most buyers do not
really understand or appreciate what title insurance is, and why it is in their
interests to have it. Allow this article
to provide a simple explanation.
After a buyer has
contracted to purchase property, but before closing of that purchase and sale,
attorneys will search and review the Public Records to make sure the seller has
the right to convey title to that property, free and clear of all claims or
liens. If any claims (such as mortgages)
or liens (such as claims of unpaid contractors for work done to improve the
home) are properly recorded in the Public Records and identified by this “title
review,” valid claims and liens will have to be paid at closing out of the
seller’s proceeds, and the seller will be paid the balance of the purchase
price remaining after such payments.
This process is designed to make sure that the buyer gets good and
marketable title to the property, free and clear of any claims except claims
made against the buyer’s own interest—such as any mortgage the buyer uses to
complete the purchase.
What would a buyer
do if the attorneys missed something in their title review? What options would a buyer have if a lien is
later claimed for work done for the seller, but that lien may not have been
adequately preserved or “perfected” according to law? Defending a lawsuit over such matters might
be more expensive than paying the lien.
Suing the attorneys who made the mistake by failing to identify a valid
claim might be another option. But,
again, lawsuits can be time-consuming, stressful and expensive. Even if the buyer were ultimately to prevail,
it might cost the buyer many thousands of dollars to get to the point of
winning a case in court. This is the purpose of title insurance.
Like most other
insurable risks, it is common for buyers of real property to purchase insurance
covering the risk that some claim or lien, whether valid or perhaps even
invalid or frivolous, may be made against the buyer’s ownership interest in
that property up to the date the purchase of that property is closed. If a claim is made against the property, the
buyer has the right to file a claim against that policy of title insurance; and
the title insurer has the obligation to “take it from there,” whether that
means defending against a claim in court or paying a valid claim so that it is
released. If the buyer purchased the
property with mortgage financing, their lender required title insurance for
these reasons. The lender wanted
insurance protecting its sizeable loan to purchase the property. The premium for the “simultaneous issue” of
an Owner’s Policy of title insurance is relatively small, and the homebuyer is
well advised to pay that premium to make sure there is coverage for claims that
might exceed the amount of the mortgage.
The most important function of title insurance is to provide legal
protection of the buyer’s title to the asset he or she is purchasing. An additional benefit is the peace of mind it
provides. Again, however; title insurance provides coverage up to the day of
closing, but not afterward. A homeowner should be well aware of any valid
claims or liens he or she allows to be perfected against the property AFTER he
has become owner of record, as long as the claim or lien is not fraudulent. A fraudulent
lien is another issue, but it is also extremely rare.
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