Title insurance? What is it and why do I have to pay for it?
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A fairly common question I hear from home sellers when they are thinking about listing their home is why
do they need to pay for Title Insurance. They don't plan on this as an expense and they didn't figure in the cost because they weren't aware of it. Since I've been dealing with a home with title issues all week, I thought I would write a post and try to answer this question and many other questions about title insurance.
Who provides the Title Insurance?
In Colorado, title insurance companies provide title insurance. They are licensed by the Colorado Division of Insurance.
What coverage does Title Insurance Provide?
Title insurance will protect a buyer against certain kinds of damage caused by a defect in the title. In Colorado, a standard title insurance policy will protect against things such as:
- Errors or omissions in deeds
- Mistakes in examining records
- Forgery
- Undisclosed heirs
- Liens for unpaid taxes
- Liens by contractors
There is also the option of getting Owner's Extended Coverage which protects against further title issues. This can be be requested when placing an offer by using the Colorado Contract to Buy/Sell.
Does Title Insurance ever find problems?Some Title Companies say that more than 1/3 of all title searches reveal a title problem. For instance, a previous owner may have had a new roof put on the house but never fully paid the contractor. Or the previous owner may have failed to taxes and there can be an IRS tax lien on the property. Or, a owner of a property paid off a second mortgage on the property, but the lien never got released. Or, a husband and wife got divorced, the husband kept the home and is selling it; but the title is still in both names. Or there is a judgement on the property that got put on by mistake.
Are there issues a title search may not reveal?
Yes. There can be "hidden items" that even the most diligent title search may not reveal. For instance, a previous owner could have incorrectly stated his marital status resulting in a possible claim by his legal spouse. Other "surprises" can include fraud, forgery, defective deeds, mental incompetence, confusion due to similar or identical names, and clerical errors in the City/County land records. These defects can arise after a home has been purchased.
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Why are there two different Title Insurance policies issued?
First, there is an Owner's Policy, which will protect the new owner from any covered claims to the property. The second type is a Lender's Policy, which will protect the lender against loss of an unpaid loan balance in the event of a claim.
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Who Pays for Title Insurance?
The Lender's Policy is normally paid for by the actual buyer of the real estate.
The Owner's Policy is paid for by the seller of the real estate. The existing owner is insuring that the buyer will be able to enjoy the home free and clear. Most real estate contracts in Colorado indicate that the seller will provide title insurance at the seller's cost.
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What Does a Title Search Mean?
Before you purchase of a home, a Title Company will search public records on the property's ownership. Once the search is finished, a buyer and seller will receive a preliminary title report. The search includes an examination of public records to determine and confirm a property's legal ownership and find out what claims are on the property. The information can include researches on the vested owner, information on any liens or other judgments on the property, as well as loans on the property and the property taxes due.
How Often Are Title Policy Insurance Premiums Paid?
The fee is due when a buyer purchases a property, it's a one-time fee. A homeowner may need to pay for lender's title insurance when the home is refinanced, as the lender wants their interest in the property to be protected, but the title policy may be offered with a discount depending on how long the homeowner has owned the property.
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What happens if there is a problem later?
The Title Insurance company will insure the property owner as long as they own the property. If a problem arises at a later date, the Title Insurance policy will cover legal fees in defense of a claim against the property that is covered under the title policy. If the property changes ownership by a quick claim deed, it's important to check with the Title insurer to make sure the insurance is still in affect.
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Selling Real Estate in the Colorado Springs area, including Monument, Fountain, Larkspur, Pueblo, Castle Rock, Manitou Springs, Woodland Park, Palmer Lake
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