What is a title? What is a title insurance policy?
Simply explained, the title to a piece of property is the evidence that the owner is in lawful possession of that property. It is a legal document filed in the county of the property.
Title insurance protects real estate owners and lenders against any property loss or damage they might experience because of liens, encumbrances or defects in the title to the property. “Defect” is an all-encompassing word used to say there is something wrong with the title that may interfere with the transfer and issuance of title insurance. Sometimes someone will say there is a “cloud on the title” meaning some defect that could prevent the transfer of the property to a new owner.
For one example, a seller is in a contract with a previous buyer and they are contesting whom gets the earnest money upon termination of the contract. The title company will not issue title insurance to another buyer until that contract has been terminated.
Title insurance protects the owner against such claims from defects. Defects are things such as another person claiming an ownership interest, improperly recorded documents, fraud, forgery, liens, encroachments, easements and other items that are specified in the policy. The Owner’s Policy insures the new owner, and a lender’s policy insures the lender’s security interest.
So, let’s look at an example of a claim. You purchased your dream home, moved in, and are making your mortgage payments. One day, you get a notice from some unknown mortgage company saying they have a lien on your house that is in default and they demand that you pay it. This is ridiculous and how could this be? If it is a valid lien, it remains as a claim on the property until the loan is paid off and the lien released. So you don’t ignore the notice, you contact your title company that issued your title insurance when you purchased your dream home. If you ignored the notice, you will get more notices, even possibly notice of foreclosure on your property, and you might lose your dream home if not resolved.
Upon notifying the title company they investigate the matter, and if it is a valid lien against your home, they will negotiate with that lender and obtain a release at their expense. Your title company’s job was to search for all liens against your home and make sure they were cleared when you purchased your home. If not all are found, the title policy protects you against any loses. All buyers should expect to get a legally binding title clear of unknown liens at closing. If for some reason they don’t, that is why title companies and title insurance exist.
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