Lenders require the homebuyer to purchase the lender’s title insurance for an amount equal to the loan. The policy is typically paid for with a one-time premium at closing and remains in effect until the loan has been repaid. This policy protects only the lender should a title problem occur.
There is also an optional owner’s policy to protect the buyer against covered losses, which provides protection until the home is sold. It covers previously unknown title defects that existed at the time of purchase that became known after the transfer of ownership. The price for this policy is discounted from the lender’s policy and it protects the owner’s equity in the property.
Title insurance companies search the public records to find and clear any such issues before closing. But despite even the most thorough search, hidden clouds or defects may exist. The title insurance policy issued at closing protects against losses that may have occurred before the time the policy was issued.
Common title defects range from unpaid real estate taxes by a prior owner, errors, fraud, forgery, and liens against the property. They may include undisclosed child support liens, discovery of a will after a property was probated – even such unlikely events as an old deed executed under a faked power of attorney.
If it was determined that the ownership was transferred in error, and the loan amount was $320,000 and the owner’s equity was $80,000, the title insurance company could be liable to reimburse the lender and owner for those amounts, should there not be a resolution with the claimant.
One defect a title company found for my client was a neighbor’s loan was accidently recorded against my client’s property. The title insurance company agreed to indemnify my client and correct the problem, so we could close. Without title insurance, my client would have paid an attorney to correct the problem and the closing would have most likely been delayed.
Another problem I saw was the previous title company recorded a probate deed incorrectly. Without the title insurance the closing would have been delayed and there may have been increased costs to the seller to clear the title problem.
Most buyers don’t realize the potential of title problems, and the last thing they want is to discover a defect in the title that could cost them money, or potentially invalidate their right of ownership.
Your experienced real estate agent and lender can make recommendations for reputable title companies.
Ask the Real Estate Agent is a weekly column by Cheryl Kempenich of Coldwell Banker Realty, who lives and offices in the Chisago Lakes Area. Submit your questions to ckempenich@cbburnet.com. All information is deemed reliable but not guaranteed. For legal assistance consult an attorney.