If you are unfamiliar with title insurance, or you have forgotten why you bought it 20 years ago, this article should help.
Before you purchase a home or investment property, you will need to:
-make sure that the person or entity selling you the property owns it.
-confirm that they have the right to sell it to you.
-research whether any additional individual or corporate entity has any right, lien, or claim to the property.
-find out if there are any existing tax liens on it, and
-know if there are open building permits, or other known issues with the property.
How will you acquire all of this information? You can look through public records, and perhaps you will find some of it. But if you want to be sure that all relevant public and private records have been searched and examined, this is where a title insurance company comes in. They will do the research for you.
The job of a title insurance company is to guarantee, beyond a reasonable doubt, that you're buying a property with a clear, unencumbered and transferrable title. They issue insurance based on this knowledge.
If their research turns up a "cloud" on the title, which means there's a tax lien, an open building permit, a shared driveway without a maintenance agreement or some other impediment, they won't sell you the insurance until and unless that issue is resolved. If they find a cloud, it signals the lawyers, sellers and real estate brokers to do whatever work is needed to clear it prior to the transfer of title.
With a thorough examination of records, title problems usually can be found and cleared up prior to your purchase of the property. By doing this, title companies work to eliminate risks before they develop, making title insurance decidedly different from other types of insurance. Because they eliminate risks from the outset, they don't expect to have to pay many claims.
Other forms of insurance are purchased with the expectation that you're going to make claims against them. For example, a health insurance company knows that you're going to visit your doctor, and they also know that a certain percentage of their clients will get seriously ill. And a home insurance company knows that homes sometimes burn or flood. Their job is to charge enough that they can pay submitted bills, (or portions of them) and make a profit while expected costs are covered by the entire pool of insured clients. And they charge regularly for their service, on an ongoing basis.
The purpose of title insurance, on the other hand, is to eliminate risks and prevent losses caused by potential defects in title. Risks are examined and mitigated before each property changes hands. This risk elimination has benefits to both you, the homebuyer, and the title company: it minimizes the chance that adverse claims might be raised, and by so doing reduces the number of claims that have to be defended or satisfied. This keeps costs down for the title company and keeps your title premium affordable.
Once a title policy is issued, the company will cover any covered loss, arising from any valid claim that may come up against your title. This protection is in effect as long as you or your heirs own the property, and is yours for a one-time premium paid at the time of purchase. Try that with a health insurance company!
Title insurance companies routinely issue two types of policies: “owner’s,” which covers the homebuyer; and “lender’s,” which covers the bank, savings and loan or other lending institution over the life of the loan. If you're purchasing a mortgage, your bank will require title insurance.
Here in the Hudson Valley, and in New York State, generally, your real estate attorney will hire a title company for you so they can begin to do their research once you're in contract for a property. You may be charged separately for the two things the title companies does: once for the title search and again when the insurance policy is issued. Your bank may also charge you for the title insurance they're ordering to protect the mortgage. These charges are generally included in your closing costs.
Buying a home is a big step emotionally and financially. With title insurance you are assured that any valid claim against your property will be borne by the title insurance company, and also that the odds of a claim being filed are slim.