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What is a Title Insurance?
A title is a document that stands as an evidence that the owner has the lawful right in possession of the property. Title insurance provides protection to the mortgage lenders and home buyers against any defects, encumbrances, liens or problems with the title during the transfer of ownership of the property. Unlike the homeowners insurance or car insurance which provides protection against future losses, title insurance provides protection to the insureds against the claim of past events or occurrences. It is an one time fee paid at closing to insure your home against any claims outlined in the policy for as long as you live in that home, it may extend to heirs as well.
Types of Title Insurance
Owner's Policy
Owner's policy protects the home buyer while buying a home and their ownership rights towards their home. It is advisable to buy owner's policy while buying a home as it generally covers the home owner against any claims outlined in the policy as long as the home owner lives in the property and it might also pass on to heirs if they have an interest in the property. It protects against any claims, legal fees, liens, encumbrances, easements, debts etc after the issuance of the policy that did not come up during the title search prior to the issuance of the policy. It also helps provide a clear title before closing process as they go through the title history of the property before issuing the policy. In some scenarios, the seller buys the title insurance to the buyer to protect the buyer against any claims and sometimes the buyer buys it for themselves during the closing process. The owner's policy amount is usually the purchase price of the property.
Lender's Policy
Lender's policy helps protect the finances of the mortgage lender against any title claim on the property. This policy provides protection only to the lenders against the title claims. Home owners may have to buy a separate owner's policy to protect their home against any claims. Most of the mortgage lenders require the home owner's to buy Lender's policy to obtain a loan. Some insurance companies provide both the owner's policy and lender's policy simultaneously and may also provide a small discount. The lender's policy is valid until the life of the loan. The lender's policy amount is usually the amount of loan.
Title Insurance Policy in California
In California, there are two types of policies available in common, CLTA policy and ALTA policy. CLTA policy stands for California Land Title Association policy which is also called as the Standard coverage policy. It only protects against the clouds on the title that are not present in the public records. This policy typically becomes active when the title company failed to detect something that is already recorded in the public records.
ALTA policy stands for American land Title Association policy and are called as Extended coverage policy. This policy provides coverage to certain defects that are not recorded in the public records.
Refinancing
The Lender's policy only protects the lender during the life of the loan. The term Refinance refers to the process of getting a new loan to pay off the current loan. When you refinance your current mortgage, your current mortgage will be paid off by the new mortgage. As the life of the old loan terminates and the lender's policy is valid only during the life of the loan, a new lender's title policy may be required to protect the new loan against any claims.
How does it work?
The process of title insurance starts when a mortgage lender orders the title company for title insurance to proceed the loan process for closing. Once the order is received, the title company performs a title search of the property to see whether there are any defects, easements, liens, encumbrances, debts or cloud on the title. If the title company finds any issues relating to the property, they may try to resolve the issues and clear the title and not all problems are resolvable. There are Requirements section and Exception section in the title commitment. Any issues that are not resolved may be moved from requirements section to exception section which may not be covered by the title policy. During the final issuance of the policy, the issues under the requirement section may be resolved or moved to the exception section. If the property is given a Clear title, it not only means it is against any title defects, it also gives the assurance that the seller is the rightful owner of the property and has the right to sell.
The significance of having a Title Insurance
It may help in protecting against Fraudulent conveyance, as the title company goes through the records in detail and also goes through the information of the previous owners.
It may also provide protection against court fees, attorney fees etc while defending against the claims insured by the policy.
Buying a home is a very significant investment, especially if a home buyer decides to buy a home with cash, it is advisable to have a title insurance for the property in case any claims pop up in the future.
Especially while buying a foreclosed property or a property with any other troubles, it is advisable to buy title insurance as the probability of claim may be higher in those scenarios.
Common Title Insurance Claims
These are some of the most common Title insurance claims. The claims covered may vary depending on the state, type of policy, type of coverage.
Public record errors
Outstanding Debts
Unknown claims
Forgery
Unknown easements (Easement is the possessory right to use another property without actually owning it)
Unknown Encumbrances (Encumbrance is a claim against a property impacting or restricting the usage)
Missing heirs
Illegal deeds
Break in chain of title (It is a record of ownership transfers of a property)
Construction Liens
Errors made by recording agencies