How Does Title Insurance Work?
- When purchasing real restate, buyers want to be certain that the sellers own the property, and have the legal right to transfer ownership. One way to do this is to run a title search on the property. During a title search, an attorney, title company or licensed abstracter can investigate the chain of title. This means he looks into public records and follows the chain of title, from the current owner moving back in time. Sometimes he discovers discrepancies in the chain of ownership, and this is referred to as having a cloud on the title. He also investigates to see if anyone has placed a lien on the property, or if there are any back taxes owed. How far back in time the search goes can be determined by state laws. The attorney, title company or licensed abstracter can issue a certificate of title, stating the condition of the title. This is not a guarantee that the title is clear. It is a statement of opinion on the state of the title by a professional.
- When selling the property, the seller can purchase title insurance for the buyer. This is one reason for the title search. It is rather like having a physical before purchasing medical insurance. You are fairly certain your house is in good health in regards to the chain of title, but just in case you are wrong, title insurance offers protection. If the buyer has a lender that is financing the purchase, the buyer typically buys a title insurance policy for his lender. Title insurance policies, like any insurance policies, vary in coverage. In essence, title insurance provides coverage for specific losses due to defect in the title prior to the purchase. This might include encroachments or building permit violations, along with questions on ownership.
- If the certificate of title was incorrect, the preparer is not held liable, unless it is proven she was negligent in performing the job. Yet, as long as the buyers receive title insurance on the property, then they are somewhat protected. For example, if it is discovered that the property was fraudulently transferred to one of the previous owners, the buyers will be protected for their financial losses. But, if the buyers purchased the home for $100,000 and when the claim is made against the property the house is now worth $150,000, the buyers may not be protected for the amount of equity they earned since the initial purchase. The buyers may only be covered for the initial purchase price.