If you’ve purchased a home in your lifetime, we’re quite sure you’ve been asked about Title Insurance. The closing agent or attorney probably went into a spiel about your abstract, the chain of title, easements, and another five to ten words that left you scratching your head.
Don’t worry, for most people, it’s not uncommon to leave the conversation unsure of what to do and whether or not you actually understood what they were saying. Often, attorneys and title companies forget that we don’t handle real estate transactions on a regular basis and for some of us, it might be our first time.
You’re asking yourself, “What in the world are they talking about and why the heck do we need it?” Well, let’s help clear some of this up for you by going over some of the basic terms in title insurance, for a purchase or refinance, that are often misunderstood and we’ll also discuss why this should be important to you.
Much like a dictionary, the title insurance world seems to be filled with various terms that sound familiar but we’re not quite sure what they mean.
In order to understand the terms that go along with title insurance, let’s discuss what title insurance is to begin with. Title insurance is an added level of protection for the homeowner or lender to protect their interest in title should any matters arise that could lead to the current owner losing ownership in their property.
Both parties want to know that the property being purchased or used as collateral to obtain a mortgage is insured against any title issues. Title insurance is provided by a title insurance company and a one-time premium is paid. For an owner, the coverage is good for as long as that person owns the property.
It’s always recommended that you purchase title insurance since there’s no way to know whether you’re receiving 100% clear title. Sure, the attorney or title company performs a title search, however, there are instances where a title exam cannot disclose an issue.
For example, it would be difficult to know the family history of an owner if there’s an estate involved in the chain of title. Do you know how many children the deceased claimed? What if a deed was signed by the Secretary of the company, however, the Secretary didn’t have authority to sign? Title insurance would protect you against these situations and more.
Title is made up of all the elements that constitute the highest legal right to own, possess, use, control, enjoy, and dispose of real estate. It’s basically the rights of ownership that are recognized and protected by the law.
The title abstract is also known to some as the title search or a title examination. This search is performed on the current and past owners of the property being purchased. The title abstract will include recorded deeds, easements, covenants, agreements, and other documents pertaining to the status of the property.
Title Abstractor/Title Examiner
By now you’re probably wondering who is responsible for searching the public records for copies of the recorded documents. In some cases, attorneys will perform the title search personally since they are certifying the title to the property. For others a title company or attorney’s office will hire a title abstractor or title examiner to search the records as a service and in return they are paid a fee.
Chain of Title
The chain of title is similar to a roadmap of the owners of the property. From the beginning, it provides the history of each owner and what happened while they owned it. Some companies perform 60 year searches, while others perform 40 year searches. The time requirements vary from state to state, and company to company. It’s your own piece of history.
Lender’s Title Insurance Policy
A lender’s title insurance policy protects the lender and their interest in the collateral. The policy amount of a lender’s policy decreases as the borrower pays down the loan. Most lenders will require a loan policy on each loan they originate. This protects their interest should an issue with the title arise.
A common misconception is that a lender’s policy will also protect the buyer, however that is not the case. In order for a buyer to have coverage, they will need to purchase an owner’s title insurance policy.
Owner’s Title Insurance Policy
Much like a lender’s title insurance policy, the owner’s title insurance policy protects the rights of the owner of record against any potential claims. This would protect the owner of real estate against any loss due to defects.
It’s similar to car insurance in that no one really plans to get into a car accident. We get the coverage just in case we need it. It’s there for our peace of mind.
When making one of the biggest investments of your life, wouldn’t you want to be protected?
Knowing what a defect is would be helpful. A defect is a blemish, imperfection or deficiency in the chain of title. It’s something that is irregular and faulty such as forgery.
The term fee simple refers to the highest degree of ownership which a person can have in owning real estate. The owner has unqualified ownership and full power to dispose of the property as they see fit.
Most people that buy and sell real estate have fee simple title.
When two or more individuals hold title to real estate jointly, the hold title as joint tenants. As joint tenants, they have equal rights to share and enjoy the property for as long as they are alive. Upon their death, the surviving owner will automatically receive the deceased ownership in the property.
This is preferred when owners want to avoid the need of probating an estate or if they want to ensure the other party receives all rights to the property. Many couples who own property together decide to hold title as joint tenants. Especially in cases involving small children as heirs, joint tenant ownership avoids the need for a guardian ad litem to represent the interest of the children.
We wish we could tell you this was a complete list of all the terms you will come across when delving into the world of title insurance, however, that would be a lie! We feel these are the most common ones you’ll see and having a basic knowledge of these terms will help you during your real estate transactions.
If you’re thinking of refinancing your mortgage, these are the terms you should know to make sure your transaction is as smooth as possible.