What Is Title Insurance?

 

Title insurance seems to be a mystery to many home buyers and sellers, so here is a little info that might help to understand it a bit better.

What is title insurance?

The title is the instrument by which we hold ownership of real property (real estate). If you have title to a property you own that property. Title insurance is a protection for lenders and homeowners against financial loss resulting from legal defects in or other claims against the property’s title.

The purpose of title insurance is to protect you against loss of ownership of the property, (it could be land, a condo, a house, an estate, or other real estate) due to a problem or defect with title. The loss could be complete (losing the property entirely) or partial (losing a portion of ownership or use). It may also include a financial loss, whether direct or in terms of future market value of the property.

Sometimes the loss could be that there was a “defective recording” of a document, an improper signing of a document, or even worse, forgery or signing under duress (being forced to sign under undue pressure, such as by blackmail).

Loss of title can also result from hidden heirs who may claim a partial interest in the property.

If there’s a recorded easement that the title company does not find when a home is sold, and the buyer is surprised by it after the closing, that title company may be writing a check to the new owner for the loss incurred in market value due to that easement, which should have been found.

Another type of loss would be if someone claimed an unrecorded easement, which might cause a “partial loss”. When the title is somewhat in question, or considered “not clear”, it is often said that there is “a cloud on title”. What you want, though, is “clear title“. You want to know that no one else will have any kind of right or claim to the property: not a lienholder, not the IRS, not a contractor, not the county tax collector or anyone else.

Title insurance covers smaller issues too, such as finding out later that a major component of the home has a building permit violation.  

Who Pays For Title Insurance? 

As for who pays for title insurance, well it depends. Doesn’t it always!?

If the buyer obtains a loan, then there are 2 title policies issued against the property. The buyer pays for the lender's title policy (which protects their lender and is almost always required by the lender) and the Seller pays for the title insurance policy which protects the buyer of the real estate (called an ALTA Homeowner's Policy).  If the buyer pays cash for the property, there will only be one policy that is paid for by the Seller, on behalf of the buyer.

In the boilerplate language of our standard Purchase and Sale Agreement that we use in Washington, on page 2 paragraph e. Title Insurance, it does state specifically which party pays for which title policies so that the practice is standardized across all transactions. 

However, it is common to see buyers ask the seller to contibute to paying for some of the buyers closing costs.  If the lender allows, then the seller could pay for the title insurance for the buyer.  

In any case, title insurnace is needed to protect the lender and the buyer agianst financial loss.

If you have specific questions about title insurnance, let us know!  team@portlandvancouverhomes.com