What is title insurance?
The title is what gives you ownership of a property. As a buyer you want a clear or clean title — one that doesn’t have liens for unpaid taxes against it, or claims of ownership by a faraway aunt or uncle, or a surprise easement through the backyard to reach power lines or a cell phone tower.
As for your lender, he wants to know that the loan is going to a legitimate transaction — the seller really does own the property and therefore can sell it to you.
The Title Search
In other words, nobody wants an unpleasant surprise after the settlement. So a couple of things happen. First, a title search is conducted. Public records are examined manually or by computer or both. It depends on how pertinent records are kept in your area. The searcher looks at deeds, wills, and trusts, tracing the history of the property back many, many years. Among the important questions is whether all past mortgages and liens have been paid. Does anyone hold an easement? Are there any pending legal actions?
But what if the title search misses something and it comes back to bite after you’ve moved in? This could happen. Buyers have even been known to lose their houses because of clouded ownership — some past problem that wasn’t discovered.
The way to avoid losing everything is to buy title insurance, which is available from title insurance companies, title agents, or, in some states, attorneys.
Title insurance is a one-time, up-front investment with rates based on the purchase price of your home and the type of policy you buy. Some are more comprehensive than others.
The policy protects you by making the insurance company liable for most claims against your ownership. If a critical document was overlooked during the title search and you actually lose the house, you’ll likely receive damages — but only if you bought an owner’s title insurance policy at closing. You can see why experts advise you to do this.
Make sure you understand the policy you’re buying — what it covers and what’s excluded. The owner’s policy should cover your full sales price. If you want a policy that covers the value of your home as it increases, ask about adding an inflation rider.
Your lender wants a policy, too. He or she won’t even loan you money unless you buy a separate lender’s title insurance policy to cover the bank’s interest in your property. The lender’s policy should be for the amount of the mortgage.
Shopping for Title Insurance
The only time you can purchase insurance is at closing. Whether buyer, seller, or both pay for the coverage varies according to local custom. In some areas the seller buys the owner’s policy and the buyer pays for the lender’s policy. Both policies take effect on closing day.
A congressional subcommittee hearing on title insurance in early 2006 looked into why consumers were paying so much for title insurance. They found the industry rife with joint ventures between title insurance companies, real estate brokers, and lenders and heard that these deals are a factor contributing to rates higher than they should be.
The Federal Citizen Information Center website offers advice on title coverage and cost savings from the Department of Housing and Urban Development.
Buyer’s Tip: You need a clear title on closing day and two title insurance policies — one to cover the owner, the other the lender.
How to Take Title
Many home buyers, especially first-time buyers, are at the closing ceremony signing the mysterious documents when the closing agent asks how they want to take title to the property — sole owner, joint tenancy, tenants-in-common … Oops! Another new subject that sounds like a foreign language. Will this never be over?
Don’t let your eyes glaze over. This really is important. There are tax and estate considerations to ponder prior to deciding. And you also need to ask whether you need to protect your home from, say, a lawsuit against your business or a malpractice suit against a partner or spouse.
Here are three of numerous ways to take title:
- Sole owner – An unmarried person buying a house alone has the easiest task. Title is taken as a sole owner in the individual’s name.
- Joint tenancy – When a married or unmarried couple buy a house together, things get more complicated. If they choose to take title with joint tenancy, each has the right of survivorship. If the spouse or partner dies, full ownership goes to the survivor. There are tax advantages for the survivor as well, regardless of marital status.
- Tenants-in-common – When two or more individuals buy a home together as tenants-in-common, they are partners who may own unequal shares and who can sell their shares of ownership independently.
Buyer’s Tip: Decide before you attend the closing how you wish to take title to the property. Consult an accountant, real estate attorney, or estate planner to learn the advantages and disadvantages of each type of ownership.
Recording the Deed
When you have title to your property, you own it. But the deed is the written document used to transfer the title from seller to buyer. It is only when the deed is recorded at the appropriate county office that your ownership is official.
Here’s what happens. On the day of closing, buyer and seller sign numerous documents and the closing agent disburses the money. Then, depending on the time of day and practices in your area, someone from the title company takes the deed and other documents that must be recorded to the county office. This is usually done first thing in the morning or at the end of the business day. A recording fee is paid.
The county recorder assigns each document a number and records the time of entry to the minute. A copy is made for the county file. Your real estate transaction is now part of the public record.
The Keys, Please
Your sales and purchase contract spells out when you can take possession of your new home. But ask your real estate or closing agent whether you’ll get the keys to the house at your closing ceremony or after the deed is recorded.
If you live where all parties gather with a closing attorney to sign documents, you might leave the meeting with keys. But if your seller is signing paperwork after you, it might be later in the day or even the next day before you get the keys, garage door opener, and security alarm codes.