Title insurance is a standard component of the closing package with just about any real estate purchase or refinance, and when bank financing is involved, there are typically two policies issued: an owner’s policy and a lender’s policy.
The basic premise behind owner’s title insurance is to give the new property owner the peace of mind that their equity is secure against hidden liens, judgments or levies against the property; incorrectly recorded instruments; previous fraudulent activity involving the property; or ownership of the property by someone else. Granted, these types of issues seldom occur, but they do happen. For example, an unreleased security interest in a subject property might surface years later in another transaction and cause a delay in completing the deal, or worse, prevent it from going through.
Title insurance companies issue policies that indemnify the owner for the amount of their purchase; therefore, the umbrella covers their equity as well. An examiner will search the records in the local deeds or registers office, looking for recorded items related to the property.
Any item that requires attention, such as the release of a prior security instrument, will be noted on a title commitment. The closing agent will then address each item and “clear” it prior to closing, allowing the parties to the transaction to close with confidence. The new owner is then issued a title insurance policy that is good for the duration of his/her ownership. If a flaw has been overlooked by the examiner and is detected later, the title company stands behind the policy and covers the owner against any loss.
When bank financing is involved, the lender will require a separate mortgagee’s or lender’s title policy covering the amount of the loan and protecting its investment. These policies also are issued at closing.
While costs vary from state to state, title insurance premiums are a bargain considering the amount and length of coverage for a one-time fee. When both owner’s and lender’s title policies are provided at closing, a discount is applied for “simultaneous issue.” Remember: Although real estate may be purchased or transferred without title insurance if no lender is involved, the new owner is assuming unnecessary risk.
Eliminating concerns for the security of one of the biggest investments anyone will ever make is worth the reasonable price of the title insurance policy.
Adam Headley is a writer and career banker with more than 30 years of experience in finance and lending. He has written extensively on the varied aspects of building, purchasing and owning a log or timber home.