Frequently Asked Questions
What is Title Insurance?
Title Insurance is a contract which indemnifies against loss arising through defect in the title to real property. If the title is insurable, the title company will guarantee against loss due to any defects in title not specifically set forth in the policy, and pay all expenses in defense of any lawsuit which attacks the title as insured within the terms of the policy.
In real estate, “title” means a right to ownership, or a document stating a right to ownership. It is an assurance that if any undisclosed claim covered by your policy arises out fo the past to threaten your ownership of real estate, it will be disposed of, or you will be reimbursed, exactly as your title policy provides. If you have clear title to a house or property, it means that you own it free and clear. The document stating your right to a property is also called a title policy.
What types of Policies are there?
- Owner’s Policy – To protect against the many possibilities of loss due to title defects, a buyer of real property should purchase an owner’s policy. This one-time premium protects your property from actual loss resulting from any risk covered by your policy, up to the amount of the policy.
- Your Fee or Owner Policy may also provide for legal defense costs should a claim arise, unless specifically excluded from your policy.
- An Owner’s Policy may also be issued on a property where no lender is involved as protection for the new owner of the property against possible claims.
- Lender’s Policy – Nearly all residential mortgages originated today are sold to investors, and the mortgage will likely require a lender’s policy to protect only the lender.
- Typically, the Lender and the Owner Policies are issued at the same time to reduce your title policy costs.
Why are separate owner’s and lender’s title insurance policies issued?
Both you and your lender will want the security offered by title insurance. Your home is an important purchase and you will want to be certain your home is yours, without worries of future claims against it. Title insurance companies insurance your rights and interests in order to protect you against claims.
Your lender is looking to insure the enforceability of their lien on your property and marketability. What is meant by “marketability?” Lenders will originate and typically “sell” your loan into the secondary market. The final investor needs to know that they have a valid and enforceable lien. Title insurance is the way of making certain.
If a loan policy is issued, why do I need an Owner’s Policy?
A Loan Policy offers no protection to the land owner. A claim may arise that does not jeopardize the lender’s interest, but may, in fact, cause a great loss to the owner.
How long am I protected?
You and your heirs are protected for as long as you or your heirs own the property.
The Lender Policy is valid through the life of the loan. A Lender’s Policy may be passed to another lender/mortgagee through an assignment of the loan, however, is not assignable should you refinance the property. A new Lender Policy would be issued at that time. An Owner’s Policy is non-transferable.
What are Hidden Risks, and are they covered by Title Insurance?
While an extensive search is done to insure that are no defects or “clouds” in title, errors or other hazards may not be evident during the search. Title insurers, unlike property or casualty insurance companies, operate under the theory of “risk elimination.” Risk elimination can only be accomplished after an intensive period of risk identification. The issuance of a title insurance policy is highly labor intensive. Trained title experts are able to identify the rights others may have in your property, such as recorded liens, legal actions, disputed interests, rights of way or other encumbrances on your title. The goal of title companies is to conduct such a thorough search and evaluation of public records that no claims will ever arise. Of course, there is always a chance of human error and changing legal interpretations; 100 percent risk elimination is just not possible. When claims arise, title insurance companies have professional claims personnel to make sure that your property rights are protected pursuant to the terms of your policy.
What are some examples of risk that my owner’s coverage will insure against?
Long lost relatives or past owners could show up, sometimes from long ago, with a claim to the property that supersedes yours.
Sometimes people fraudulently sell houses that don’t belong to them. For example, the husband or wife of a divorcing couple could forge the signature of their spouse, and take off with the proceeds of the sale. In a court of law, the rights of the injured spouse could be upheld and the property could go to that party, no matter how much money the unsuspecting purchaser had placed in the house.
To get loans, people often use property as collateral (security against nonpayment). If someone defaults (doesn’t pay back) their loan, the lender has a legal right to sell off the property to get their money back – even if the house has since sold to a new owner. This is because the lien (claim to a property as payment on a debt) is on the house. Unless the debt is paid off, the lien stays with the house even when it changes ownership.
An easement is a right to use the land of another for a special purpose. For example, the city may have plans to build a sewer line sometime in the future. If the sewer lines run through the back of your yard, and if the city has an easement on the underground portion of your property, this might cause your prize roses to be dug up, or prevent you from building a pool in your back yard.
If a homeowner fails to pay their taxes, the IRS can obtain a lien (a claim to a property in case of nonpayment of debt) on the home. If the homeowner sells their home, without settling the tax lien, the IRS can legally get the new homeowner to pay the original homeowner’s back taxes. And if the new homeowner fails to comply, they can lose their new home.
What is the Title Search?
Trained personnel investigate public records to determine the “chain of title,” which is the history of the ownership and claims upon a piece of land. By law, county records have to be kept on all property transfers, wills, liens, tax matters, etc., and these are the types of records searched in order to determine a “chain of title.” The end product of a search is knowledge of potential and actual encumbrances upon a title. Obviously, liens on a property need to be paid off or knowingly assumed by the new owner – before transfer of title can occur. A title company will make sure that this happens. Easements and other factors need to be known by a potential owner. The new owner can accept them, or look elsewhere if a sewer, for example, will prevent him from building his dream pool.
Most importantly, a title search is run to determine whether the seller of a property has the legal right to sell that property to avoid the possibility of an actual owner (or co-owners) turning up in the future to repossess what is legally theirs to possess.
Who will pay for title insurance charges, the buyer or the seller?
Surprisingly, who pays is not uniform from state to state. In some states the buyer will pay while in others the seller will pay. But, in every case the questions of who pays closings costs is a matter of agreement between the buyer and seller. Usually, this agreement is based on the customary practice in your state.
In Illinois, it is the usual practice that the buyer pays the Lender’s policy and the seller pays the Owner’s policy at closing.
How much should I expect to pay in closing costs?
The amount you pay for closing costs will vary; however, when buying your home and obtaining a new loan, an estimate of your closings costs will be provided to you pursuant to the Real Estate Settlement Procedures Act after you submit your loan application. This disclosure provides you with a good faith estimate of what your closing costs will be in the real estate process. An itemized list of charges will be prepared when you close your transaction and take title to your new property.
Is a personal check acceptable to cover my closing costs?
Your closing funds should be in the form of a cashier’s check, certified funds or wire, issued by a banking institution, made payable to the Title Company or Attorney in the amount requested. A personal check may delay the closing or may be unacceptable to the Title Company or Attorney. An out-of-state check could also cause a delay in your closing due to possible delays in clearing the check.
Are there renewal premiums?
The original premium is your only cost as long as you or your heirs own the property. There are no annual payments to keep your owner’s Title Insurance Policy in force.
A current owner may upgrade the amount of a title policy on a property, should it increase significantly in value due to improvements (such as building on a vacant lot or an addition to an existing structure.)