Title insurance is an expense that buyers incur at closing, and yet many buyers are confused about what risks it insures. Title insurance is the best way to protect your ownership interests in the property you buy from competing claims, including liens, that arose before you took ownership.
What Is Title Insurance?
Title insurance is an insurance policy that covers the risks and costs associated with a title defect that is discovered after you take ownership of the property. When you buy property, your mortgage lender will require a title search be performed to make sure there are no title defects.
The title search involves searching the public real estate records to identify any defects or encumbrances on the property. Common defects that the title search can identify are tax liens, contractor’s liens, and judgment liens. If there are liens or other title defects, they must be resolved before closing on the sale.
Sometimes, however, the title search is unable to discover a valid lien claim. That is why your lender will require you to secure title insurance to protect its interest in repayment of the mortgage. You will pay a one-time premium to the title insurance company for the lender’s title insurance.
It provides protection against future losses that might result from a variety of possible title defects, liens, or encumbrances that were not discovered during the title search. You may also purchase an owner’s title insurance policy. An owner’s policy will protect you from the same types of defects, liens and encumbrances that the lender’s policy covers.
What Does Title Insurance Cover?
Title insurance protection covers the costs of clearing your title of defects, including the cost of your legal defense in court if needed. It covers your financial losses up to the face amount of the policy that are caused by covered claims against your title.
Covered claims consist of claims against the property, which typically relate to a prior owner’s financial responsibility before you took ownership. For example, a prior owner could have hired a contractor to do work on the property before you took title but failed to pay the contractor. The cost of resolving the contractor’s lien claim is a covered claim that would be covered by your title insurance.
Also, if the title company is required to defend your title, the title insurance will pay your legal expenses. Other defects in the title that are not uncommon include judgments, liens, unpaid real property taxes, outstanding interests in the title, fraud or forgery in prior conveyances of the title, problems with prior powers of attorney, and problems with minors and mental incompetence that were not discovered by your title search in connection with your purchase of the property. Your title insurance will protect you against all of these.
It is important to understand, however, that title insurance does not cover any of the losses that are listed in your policy’s exclusions and exceptions. Among those exclusions are defects in the title that arise after you take title, such as tax or contractor liens that are based on your own financial responsibility.
How Could A Lien Claim Be Missed In A Professional Title Search?
In most cases, liens must be filed in the public real estate records to be valid and enforceable against the property and subsequent property owners. However, state laws give claimants a certain amount of time to get their claim filed. If the property is transferred to a new owner during that time period, the title search may not discover the lien claim because it has not yet been recorded.
Also, some states’ laws allow local municipalities to have valid property liens without being recorded in the public record. Those may consist of certain code violations, open permits with unpaid fees, and outstanding utility bills.
Although those obligations are the responsibility of the prior property owner, those expenses can be attached to the property like a lien. If your property is encumbered by one of those obligations when you bought it but it was not discovered by your title search, you will have to bear the cost of resolving the issue with the municipality. However, an owner’s title insurance policy would cover those costs.
How Long Is Title Insurance Effective?
When you buy title insurance, you pay a one-time premium for it. For a lender’s policy, the insurance lasts for so long as the loan is outstanding. The amount of coverage diminishes as the loan balance is paid down.
On an owner’s policy, the coverage lasts for as long as you own the property. If you pass away while you own the property, the policy continues in effect and protects your heirs. That means your heirs will not have to bear the expense of a lien claim that arose before you bought the property.
Contact The Title Experts At Mathis Title Company
Clearing a title of liens and other defects can be a headache and very costly. It can also put your ownership interests in jeopardy. With the help of the title experts at Mathis Title Company, you can rest assured that your ownership interests and those of your heirs will be protected against a myriad of claims on your property.