Introduction
When you buy a home, you’re not just acquiring a physical structure—you’re purchasing the legal right to the property, known as the title. Ensuring that the title is clear of legal issues is a critical part of the homebuying process. A title examination helps identify any problems that might impact your ownership rights, but not all issues can be uncovered during the initial search. That’s where title insurance comes in. Title insurance protects you from unforeseen claims or defects in the title that may arise after the purchase, giving you and your lender peace of mind. Understanding how title insurance works and what it covers is an essential step in protecting your investment.
What is a title examination?
Title is the right to own, possess, use, control, and dispose of property. When you buy a home, you are actually buying the seller’s title to the home. Before the closing, an attorney or title company (normally hired by your mortgage lender) will usually conduct a title examination by searching public records. The purpose of a title examination is to discover any problems that might prevent you from getting clear title to the home. The title examiner will then issue a report that describes the property, along with any title defects, liens, or encumbrances discovered in the course of the title examination.
What are some common title problems?
Most run-of-the-mill title problems can be cleared up before the closing. But in some cases, certain title problems can delay the closing. If a title problem is severe enough, you may decide not to purchase the home. A title problem can even result in your mortgage lender refusing to finance the purchase. Many different situations can affect a property’s title. For example:
- A home’s seller claims to be single, but a title search reveals that the seller is married and owns the house with his or her spouse.
- A title search reveals that the property is titled in a deceased individual’s name, but there is no will on file to indicate how he or she disposed of it.
- A home’s sellers took out a home improvement loan, which they have since repaid. However, the lien was never removed from the title.
- A home’s sellers had a dispute with a contractor over the workmanship on some home renovations, and the sellers withheld final payment on the contract. The contractor filed a mechanic’s lien on the property, which was never removed.
- You are buying a home and a property survey discovers that the family room that the sellers added on a few years ago is partially situated on a neighbor’s property.
What is title insurance?
Title insurance protects you against title defects that were not discovered in the course of the initial title examination and that may not appear until after you’ve taken ownership of the property. A title insurance policy protects you and your heirs against title defects for as long as you own the property. The policy represents the title insurance company’s responsibility to compensate you for any covered loss caused by a defect in the title or any lien or encumbrance that was not discovered in the title examination.
Title insurance companies usually offer two types of title insurance policies: standard and extended. Standard policies provide limited coverage, offering protection for certain off-record title problems (e.g., fraud), as well as those that could be uncovered during a search of public records (e.g., recorded mechanic’s liens). Extended policies provide the same coverage as standard policies, as well as additional coverage for title problems that aren’t found so easily, such as unrecorded liens and title defects that could only be uncovered during an inspection of the property.
You usually pay a one-time fee for title insurance, the price of which varies depending on the location of the home, its purchase price, and the type of title insurance coverage you select.
What about lender’s title insurance?
When you get a mortgage, most mortgage lenders require you to take out lender’s title insurance, which protects the lender’s interest in the property. Coverage on a lender’s policy is limited to the amount of the loan and gradually decreases as the loan is paid off. Keep in mind that a lender’s title insurance policy does not protect your full interest in the property. As a result, you should consider purchasing a separate owner’s policy to protect your interest in case of title defects.
Conclusion
While a title examination helps uncover known defects before closing, only title insurance can protect you from unexpected claims that surface after you’ve taken ownership. From undisclosed heirs and clerical errors to unrecorded liens, title issues can pose costly and stressful challenges. Title insurance—especially when paired with a lender’s required policy—adds a vital layer of security. For a relatively low one-time fee, you can safeguard your ownership rights and avoid potential legal disputes down the road. When it comes to your home, protecting your title is protecting your future.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
