Title Insurance in Plain English

What is title insurance?

Title insurance protects owners of real estate along with their lenders against financial loss resulting from certain defects in their property title and from potential claims made against the property by others.

Broadly speaking, there are two types of title insurance: one for real estate owners and one for lenders. Let’s take a look at each type.

Owner’s title insurance

If you are purchasing a property, you have the option to purchase owner’s title insurance for the real estate you are buying. While you are not required to buy it, most people do. An owner’s title insurance policy protects you, the buyer/owner of the home, from certain defects in the title to your property and from competing ownership claims made by others.

For example, someone could claim that the person who sold you the property did not own it and therefore could not sell it to you. You would likely have to fight this claim in court. An owner’s title insurance policy protects you against this kind of risk. With a title insurance policy protecting the property, the title insurance company would contest the claim on your behalf. If they were unsuccessful in defeating the claim, they would reimburse you for any covered losses based on the amount of insurance you purchased.

For most homebuyers, a real estate purchase is the largest investment they will make in their lives. The potential financial loss in the event of a title claim can be very significant, and as a result, most people buy an owner’s title insurance policy when they purchase a property to protect themselves and their equity.

Lender’s title insurance

If you’re getting a loan to purchase a home, or refinancing an existing home loan, you will almost always be required to purchase a lender’s title insurance policy. A lender’s title insurance policy protects the lender against the same kinds of risks that the owner’s title insurance policy protects you against, as well as some additional risks that are particular to a lender. These additional risks are covered under what are called policy endorsements, and are typically related to the location of the property, the property type and/or the type of loan.

How is title insurance underwritten and issued?

Prior to closing on the purchase or refinance of a home, the title insurance company you select extensively researches legal records for your property, working to identify and resolve any issues that might adversely affect you or your lender. Here is an overview of the kind of work they perform.

The Title Search

First, the title company performs what is called a title search on the property in which they look at various public records to understand a few key areas of interest about the property title:

Determine if there is marketable title
Does the seller possess a marketable title? In plain terms, is the seller the owner and legally able to sell you the property?

Review title restrictions
What restrictions exist on the property? For example, there may be restrictions on how the property may be used and these will need to be checked against your intended use of the property to make sure that they do not violate any of the lender’s rules regarding restrictions on the property. For example, if you are purchasing a property and intend to use rental income from the property to qualify for the loan, the lender will want to know whether the property can legally be used as a rental property.

Review easements
What easements exist on the property? An easement is an agreement allowing a third party limited use of a property. There are many types of easements that may affect a property. Common examples include utility easements (for telephone poles), aviation easements (for airplane overflights) and conservation easements (to limit development). These will need to be checked against your intended use of the property and to make sure that they do not violate any of the lender’s rules regarding easements.

Review liens
What liens exist on the property? A lien generally relates to a loan that is secured by the property. The most common example of a lien that affects property title is the lien of a mortgage lender that has made a loan for which property is pledged as collateral to secure repayment. The title search will establish what liens there are on the property, establishing for example, whether the seller has loans that are secured by the property. All liens on the property will need to be evaluated and resolved to the satisfaction of you and your lender.

Review taxes
Are there any delinquent taxes or other claims/matters that may affect your intended use of the property?

The Preliminary Title Report

Once the title provider completes the title search, they will issue what’s called a preliminary title report. This report encompasses the title company’s research and related findings from the title search. In addition to the title search findings, the preliminary title report will usually include the following:

Property description
A description of the subject property you are purchasing (or already own if you’re refinancing) as well as your intended ownership rights to the property.

Policy terms and price
The type of title insurance policy being quoted and the premium (cost) for the policy.

Policy exceptions and exclusions
Exceptions and exclusions to coverage in the policy will include both general exceptions, or things that the insurance company excludes in their coverage for all properties, as well as special exceptions, or items specific to the property to be insured. Exceptions and exclusions are items for which the title insurance policy will not protect you.

Conditions required for the policy to be issued
The title insurance company will require that specific conditions be met in order to issue the title insurance policy. These are often fairly routine. For example, in a purchase transaction, the provider will want to see that the current owner’s (seller’s) mortgage has been paid in full before issuing a policy. Occasionally, a more complex issue may surface, such as a property line dispute with a neighboring property. Your title provider is responsible for coordinating and overseeing the resolution and clearing of these conditions. They may require your input or participation to resolve them and will both keep you informed and include you in the resolution process as needed.

The Title Commitment

After the title provider has cleared all of the conditions detailed in the preliminary title report, it will issue what’s called a title commitment. The title commitment, similar in structure to the preliminary report, is a title insurance company’s binding offer to sell title insurance on specific terms for a specified period of time (usually up to six months following the date of the title commitment).

The Final Title Insurance Policy

Promptly following closing, you should receive a final closing package that will include copies of the documents that were required to settle your transaction. The final closing package should contain copies of the preliminary title report and the title commitment. After you close on your property purchase or your loan refinance, the settlement agent will finalize and send the property deed and/or mortgage documents to the local government recording office to be recorded. Once these documents have been recorded, the title insurance company will issue the final title insurance policy. The recording process can take 30 to 60 days (or longer), depending on how busy the government recording office is.

Making a claim if title issues come up

Most homeowners do not run into issues with the title to their properties. However, issues can and do arise. If you're going to encounter a problem, it's typically i) when you are trying to conduct a transaction related to your property, like refinancing, and your action is impeded by a title issue, or ii) when someone makes a claim against you or the property.

What to do if you become aware of a title issue?

If you experience a problem with the title to your property, you should review your title insurance policy and take any required action in a timely fashion. If you aren’t able to locate a copy, the title provider who handled your transaction should be able to provide you with a copy. The title insurance policy will include instructions regarding the filing of claims that you should review and follow carefully. Depending on the nature of the problem you may want to consult an attorney who is experienced with property title matters for advice. You may also wish to contact your title insurance company and explain to them what you have learned and the nature of the problem.