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The Lowdown On Title Insurance Explained
Centuries ago, people can claim ownership to land just by visibly occupying it.
Those were the days before the systems of real estate is in place and enforced like it is today. But what happened to the ownership between the time when proper legitimate ownership was granted and today can be a blurry mess.
Because of real life instances where ownership of land is disputed (even today), home buyers and sellers have found title insurance a necessity at times when there is reasonable doubt to who a piece of real estate really belongs to.
Title insurance really started when attorneys felt that they need some form of financial protection should errors be made when interpreting abstracts.
And as mentioned earlier, because of challenges to land ownership citing events that happened decades earlier, sometimes even before the parties in question were born, title insurance is pretty much available to anyone to buy today.
Yet don’t be confused just because it has little to do with medical or life insurance. The basic principle of title insurance is the same as any other policy.
People pay a premium in exchange for coverage should they suffer a loss. Just that in this event, the loss has to originate from errors in the title.
When a request is made to a title company for a policy, an examination of public records regarding the property is conducted by an abstracter (title searcher).
The company attorney will then assess the findings stated in the reports and provide an opinion on identifying the fee owner, plus any other party with a legitimate interest in the property.
When these information is compiled and typed, it becomes a title commitment.
With this title commitment, the title company commits to insuring the property. At this juncture, conditions might be included which has to be met for proper coverage or renewal.
It is important to note here that a title commitment is not the same as an abstract.
An abstract is a summary of all recorded events concerning the tile listed in chronological order. While a title commitment is like a screenshot of material information concerning the title at that moment in time when it was requested.
At any point, don’t expect a title company to conduct a visual inspection or conduct a boundary survey of the land in question.
It is the buyer’s responsibility to conduct these due diligence checks.
While it is theoretically and practically possible to purchase title insurance at any point in time, in reality and in practice, it is usually purchased only when a real estate transaction takes place.
The only thing predictable with insurance is that the premiums are unpredictable. A lot of variables come into play when determining the premium.
This is because the amount of coverage being underwritten will heavily depend on the purchase price.
While there are instances where buyers do not insure for the full amount of the purchase price of his home for various reasons, the customary practice is to insure for the full purchase price.
And the policy commences once the one-off premium is paid and remains effective as long as the buyer retains an interest in the property.
The actual cost of premium is usually about half a percentage of the coverage involved.
Mortgage lenders has a huge stake in the ownership of real estate as it is their money being loaned and used for transactions. And they hold the property as collateral should the debt be defaulted.
While homeowners will purchase owners policies, lenders have available to them what is called a lenders policy.
As the name suggests, it is supposed to offer similar protection to the lender as a typical title insurance policy.
But there are 3 main differences between the two:
- Coverage is only for the amount of loan owed
- No exceptions for claims to ownership resulting from physically inspecting the property
- The policy is assignable to subsequent holders of the loan
It is important to note that a lender’s policy will have a decreasing coverage limit as the loan will be slowly repaid over time by the borrower. And that this policy only covers financial losses due to title problems. It does not cover defaults.
An important section of a title policy is a statement stating how claims will be handled.
You must absolutely read up the details of everything in this part. Here are some key points.
When a claimant makes a claim, the company reserves the right to either fight the claim in court or make payment to the losses incurred by the claimant.
Should there be a fight in court, any legal costs borne by the company are in addition to the amount of coverage explicitly stated in the policy.
And when a claim of loss is paid, the amount of coverage will reduce by the amount of loss paid.
Why title insurance has become a mainstay in the industry
There are 4 big factors that has strongly contributed to the growth in awareness and demand for title insurance.
As a grantor, the policy can transfer the obligation of bearing expenses in defending a grantee’s title and possession.
There is always a risk that the seller would not be able to fulfill his covenants and warranties. Insurance would provide adequate coverage before dispossession takes place.
By minimizing or even eliminating the risks of losses incurred from defective titles, lenders are able to offer lower interest rates on home loans.
When there is no reasonable doubt as to who the owner of real estate in the title, it is referred to as a marketable title. In certain transactions, the presence of a marketable title can be paramount to closing. Title companies can insure a title as being marketable.
In closing, it is important to remind yourself that insurance works in mysterious ways.
Very often we don’t make a claim to it for years and even decade. Leading to us questioning whether it is money down the drain.
That can very well be so.
Yet it only takes one significant setback to someone to realize how much of a role it can play. So determine for yourself whether title insurance is critical to your own situation and real estate transactions.