Most people have never heard of title insurance until they buy their first home. When they sign the purchase agreement, the reference to title insurance is likely to be briefly mentioned, if at all. Then, when they see the premium with the list of fees at closing, they might start asking why they need title insurance.
When a property is financed, purchased or sold, a record of that transaction is typically filed in public records. In addition, records of other events that may affect ownership of a property, such as liens, are also archived.
When you buy title insurance for your property, a title company searches these records to find - and fix, if possible - several types of ownership issues. First, the title company searches public records to determine property ownership status. After the search, the underwriter will determine the insurability of title.
Title insurance is a unique form of insurance because it protects you against ownership claims against your property.
Unlike other types of insurance, a title insurance policy, for a one-time premium, provides protection to you and your heirs for as long as you own the property. Also, unlike other types of insurance, title insurance protects you from events that happened in the past, such as a forgery, overlooked heir, or other type of claim, by an individual or entity who may truly (but unknown to you) have a right to your property.
The American Land Title Association reports that approximately 1 in 3 of all real estate transactions have a defect in title. Title insurance protects against loss or damage against any future claims people may have against your ownership of the property. The good news is Michigan is a leader in year-over-year decrease in defect frequency with a 26.5% decrease. So collectively, we are succeeding in decreasing defect frequency.
There are several ways title to your property can be defected. Even if you don’t lose your property altogether, certain title defects can make it impossible for you to sell or even give away your property. A title defect may also be referred to as a “cloud.” These must be resolved before selling the property, and they include some of the following:
A title agent or a real estate attorney, will make sure there are none of the issues above on a property for sale, and there is no break in the chain of title or other important documents that would cloud a clear title.
Many people believe that since title insurance is covering events in the past, that it is something you can choose to ignore. After all, the title company did a search of the property already so why not simply review the previous policy?
It’s a common misconception that a title search will uncover every possible defect in title. Title searches only discover events and documents of public record, so anything done illegally or without proper documentation may not be known until sometime in the future.
Remember, even the most thorough title search is subject to human error. And even if the title company has done their job perfectly, there may have been an error in recording or at some other step in any previous transaction including the property by other non-related parties.
Lenders do not consider title insurance optional. In fact, nearly all institutional lenders insist on having their own policy separate from the owner’s policy. If it’s important for their partial investment in the property, it is even more important for the homeowner to be protected for the full value of the home.
The lender’s policy protects the lender for the amount of the loan, and for the validity and position of their lien. Only an owner’s policy fully protects the buyer against title problems that arise after the home is purchased.