In basic terms, title is your right to own, possess, use, control, and dispose of property. When you buy a home, you are actually buying the seller's title to the home. A deed is the written legal evidence that the seller has conveyed his or her ownership rights to you.
Before the closing meeting when the actual transfer of ownership occurs, an attorney or title specialist generally conducts a title examination. The purpose of the title examination is to discover any problems that might prevent you from getting clear title to the home. Generally, title problems can be cleared up before settlement. But in some cases, severe title problems can delay settlement, or even cause you to consider voiding your contract with the seller.
What are some common title problems?
Title problems come in all shapes and sizes. Following are just a few examples of situations that can create a title problem:
- You are buying a house from a single man or woman, but the title search reveals two names on the ownership record and describes them as married.
- The home you are buying was owned by the seller's parents, who intended to use it for their retirement. The seller's father died several years ago, and the mother just recently passed away. A title search reveals that the property is titled in the mother's name, but there is no will on file to indicate how she disposed of it.
- You are buying a house to which an addition was made several years ago. The sellers of the home took out a home improvement loan and did the work themselves. They have repaid the loan, but the lien was mistakenly never removed from the title.
- The seller of the house added central air conditioning several years ago. The seller and the contractor had a dispute over the workmanship, and the seller withheld the final payment on the contract. The contractor filed a mechanic's lien on the property, which has never been removed.
- You are buying a house with a newly paved driveway. The seller of the house bought his neighbor's share of their shared driveway and converted it into a private driveway when the neighbor built a new driveway on the other side of his house. Unfortunately, the expanded driveway doesn't appear in the public records.
As mentioned above, some title problems are easily corrected, while others can be very difficult to resolve. You should insist on being kept informed of every step in the title checking process. If title problems are uncovered, it is important for you to understand your legal rights.
What is title insurance?
Title insurance is the best way to protect yourself against title defects, which may not appear until after you've taken ownership of the property. Before a title insurance policy is issued, a title report is prepared based on a search of the public records. This report gives a description of the property, along with any title defects, liens, or encumbrances discovered in the course of the title search. Title insurance protects you against title defects that were not discovered in the course of the title search (for example, forged signatures). If such a defect is later discovered, your title insurance would cover you.
How does title insurance protect you?
If title problems are severe enough, you could actually lose your house. A title insurance policy protects you and your heirs against title defects for as long as you own the property. The policy represents the title insurance company's responsibility to compensate you for any covered loss caused by a defect in the title, or any lien or encumbrance that was not discovered in the title search. Most title insurance policies do have exceptions, however, so it is important to understand the policy.
What if a lender makes you buy lender's title insurance?
That isn't enough. Most mortgage lenders require you to take out lender's title insurance when you get a mortgage. This type of policy protects the lender's lien on the property, and makes the mortgage more attractive on the secondary market. Coverage on a lender's policy is limited to the amount of the loan, and gradually decreases as the loan is paid off. However, a lender's title insurance policy does not protect your full interest in the property. You should consider purchasing a separate owner's policy to protect your interest in case of title defects.