Why You Need Title Insurance

When you purchase your home, it’s important to make sure that there are no problems with the home’s title, and that the seller really owns the property. Problems with the title can limit your use and enjoyment of the property, as well as bring financial loss. That is what a title search and title insurance are for.

After your sales contract has been accepted, a title professional will search the public records to look for any problems with the home’s title. This search typically involves a review of land records going back many years. More than 1/3 of all title searches reveal a title problem that title professionals fix before you go to closing. For instance, a previous owner may have had minor construction done on the property, but never fully paid the contractor. Or the previous owner may have failed to pay local or state taxes or special assessments. (See below for some other common title problems). Title professionals seek to resolve problems like these before you go to closing. Title insurance is designed to cover homeowners should the title company fail to discover or resolve a problem before closing.

There are two types of title insurance: Owner’s title insurance and Lenders title insurance.

The Owner’s Title Policy

Sometimes title problems occur that could not be found in the public records or are inadvertently missed in the title search process. To help protect you in these events, you will receive an Owner’s Policy of Title Insurance at closing to insure you against potential problems.
Owner’s Title Insurance, called an Owner’s Policy, is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts for as long as you or your heirs have an interest in the property. (In the state of Michigan, Sellers pay for the Buyers’ Title Policy.) Only an Owner’s Policy fully protects the buyer should a covered title problem arise with the title that was not found during the title search.

Possible hidden title problems can include:

  • Errors or omissions in deeds
  • Mistakes in examining records
  • Forgery
  • Undisclosed heirs

An Owner’s Policy provides assurance that your title company will stand behind you — monetarily and with legal defense if needed — if a covered title problem arises after you buy your home. Your title company will be there to help pay valid claims and cover the costs of defending an attack on your title.

The Lender Title Policy

When a property is purchased for cash, there is no lender, and thus no lender title policy. If the property is purchased via a mortgage, the lender will almost certainly require a lender title policy, and in the state of Michigan, Buyers are the ones who pay for this policy. The Loan Policy is usually based on the dollar amount of your loan. It only protects the lender’s interests in the property should a problem with the title arise – it does not protect the buyer.

The policy amount decreases each year and eventually disappears as the loan is paid off. Because the amount of coverage decreases over time along with the lender’s interest in the property, lender title policies are less expensive than owner’s policies.

Common Title Problems

Here are three short stories on some common title problems:

Fraud & Forgery

Those involved in real estate fraud and forgery can be clever and persistent, which can spell trouble for your home purchase.
In a western state, an innocent buyer purchased an attractive home site through a realty company, accepting a notarized deed from the seller. Then another couple, the true owners of the property — who lived in another locale — suddenly appeared and initiated legal action to prove their interest in the real estate was valid. Under the Owner’s Title Insurance Policy of the innocent buyer, bought for a one-time fee at closing, the title company provided a financial settlement to protect against financial loss.

As it turned out, the forger had spent time in advance at the local court house, searching the public records to locate property with out-of-town owners who had been in possession for some time. That individual then forged and recorded a deed to a fictitious person and assumed the identity of that person before listing the property for sale to an innocent purchaser, handling most contacts through an answering service. The identity of the notary appearing on deeds was fictitious as well.

Fraud and forgery are examples of hidden title hazards that can remain undetected until after a closing despite the most careful precautions. Although emphasizing risk elimination, an Owner’s Policy protects you financially by providing negotiation by the insurer with third-parties, payment for defending against an attack on the title as insured, and payment of valid claims.

Conflicting Wills

After purchasing a residence, the new owner was shocked when a brother of the seller claimed an ownership interest in the property, and sought a substantial amount of money as his share. It seemed that their late mother had given the house to the son making the challenge, who placed the deed in his drawer without recording it at the court house. Some 20 years later, after the death of the mother, the deed was discovered and then filed. Permission was granted in probate court to remove the property from the late mother’s estate, and the brother to whom the residence initially was given sold the house. But the other brother appealed the probate court decision, claiming their mother really did not intend to give the house to his sibling. Ultimately, the appeal was upheld and the new owner faced a significant financial loss. Since the new owner had acquired an Owner’s Policy of Title Insurance upon purchasing the real estate, the title company paid the claim, along with an additional amount in legal fees incurred during the defense.

Missing Heirs

A couple purchased a residence from a widow and her daughter, the only known heirs of the husband and father who died without leaving a will. Soon after the sale, a man appeared claiming he was the son of the late owner by a former marriage. As it turned out, he indeed was the son of the deceased man. This legal heir disapproved of his father’s remarriage and had vanished when the wedding took place. Nonetheless, the son was entitled to a share of the value of the home, which meant an expensive problem for the unwary couple purchasing the property.
Although the absence of a will hindered discovery of the missing heir in a title search of the public records, an Owner’s Policy of Title Insurance issued for a one-time fee at the time of the real estate transaction would have financially protected the couple from the claim by the missing heir. For a one-time charge at closing, an Owner’s Policy will safeguard against problems including those even an exhaustive search will not reveal.

Upgraded Title Policies

Title policies are typically issued with “standard exceptions.” Some common exceptions include encroachments and boundary issues that an accurate survey would disclose and any easements not shown by public records. (There are some other standard exceptions, which are listed in the title commitment for the property.) To issue a policy without exceptions, a survey is generally needed. That being said, for an extra $100 or so (much less than the cost of a survey), you can usually upgrade your policy to an Eagle policy, which is a policy without exceptions. While there is a good chance you will never need to rely upon your title insurance, there are situations where it is wise to have a policy without exceptions.

If you have an questions about title insurance, ask your agent or contact us – we would be happy to supply or find the answers you need: TheBrennerTeam@gmail.com, 734-945-7591.