A Legal Guide To Title Insurance In Real Estate: Essential Insights And Advice
Title insurance is a contractual obligation that safeguards against losses arising from title defects such as liens, encumbrances and unknown issues at the time of policy issuance. It provides assurance of a clear title and ensures loan priority.
You have probably heard of the term but wonder, What is title insurance in real estate? Title insurance protects home buyers and lenders from potential financial loss due to defects in the property title.
Before you purchase a home, it is essential to understand what title insurance is, how it works and its benefits. On this page, we will discuss the ins and outs of title insurance and provide essential insights and helpful advice. Of course, if you have any further questions or concerns, feel free to contact us at Batson Nolan PLC.
What Is Title Insurance In Real Estate?
Title insurance protects real estate owners and lenders from property liens, encumbrances or defects in the title to the property.
There are generally two types of title insurance: owner’s title insurance and lender’s title insurance. An owner’s policy is purchased by the homebuyer and is meant to protect you, your heirs, trustees, beneficiaries and anyone who may receive title to the property.
A lender’s policy can be paid by either the homebuyer or the seller, is almost always required and protects only the lender. We will discuss each more in-depth below.
The overall purpose of title insurance is to protect buyers and lenders from financial loss due to property title defects. Any real estate transaction must have a clean and clear title to confirm the property is free from liens.
Key Parties Involved In Title Insurance
While individual situations will differ and every scenario is somewhat unique, several key parties are generally involved in title insurance.
Title insurance is intended to protect all parties to a real estate transaction, including:
- Sellers
- Buyers
- Lenders and
- Real estate agents and brokers.
The protections pertinent to you will depend on your party to the transaction.
Importance Of Title Insurance In Protecting Property Ownership
The role of title insurance in real estate transactions is to protect interested parties from risks like flawed records, incorrect ownership and falsified documents.
Title insurance is essential in protecting your rights in property ownership. You are exposed to a significant risk of financial loss from a title defect without title insurance. For instance, imagine, after a long extensive search, you find the home of your dreams, only to realize, after closing, that the previous owner had yet to pay property taxes. You might be thinking, well, that’s the prior owner’s responsibility, but without title insurance, the financial liability will fall solely on you, the buyer. On the other hand, if you have title insurance, that coverage will protect you in this situation.
Title insurance will protect you for as long as you own or have an interest in the property. This is important because defects in the title only sometimes arise or become known immediately or even shortly after the sale. Sometimes, defects in titles do not appear for years.
What Does Title Insurance Cover In Real Estate?
Title insurance covers many issues and potential defects to property titles.
- Protection against ownership claims and legal disputes (e.g., a dispute as to a will);
- Coverage for unknown liens, encumbrances or defects in the title;
- Assurance of marketable and insurable title; and
- Financial protection for title-related losses or damages.
In Tennessee, title policies usually cost about 0.5% to 1.0% of the home’s purchase price and are typically included in the home’s closing costs.
Types Of Title Insurance Coverage
As mentioned earlier, there are generally two types of title insurance: owner’s title insurance and lender’s title insurance. Both provide essential protections for different parties to the real estate transaction. Understanding the differences between the two and what they cover is crucial.
Owner’s Title Insurance Policy
Owner’s title insurance protects the purchasing homeowner if someone sues or otherwise says they have a claim against the property before the purchase.
These policies are purchased as a guarantee against potential financial loss and are generally optional. In other words, you are not required to purchase owner’s title insurance. However, we strongly recommend it. Owner’s title insurance protects the home buyer from the most common risks, including the following:
- Conflicting ownership claims;
- Invalid deeds, mortgages or releases;
- Mistakes or flaws in public records (e.g., wrong signature);
- Fraudulent and forged documents;
- Undisclosed easements to the property; or
- Unpaid taxes, judgments or liens on the property.
Other Common Examples of Title Insurance Coverage
- Unknown heirs or previous undisclosed owners;
- Pending unresolved lawsuits or other legal encumbrances that invalidate the seller’s legal claim to the property; and
- Agreements that may reduce or limit the buyer’s use or value of the property.
Remember, even if you hire a title company to perform a title search, there’s always the chance that something will slip through the cracks.
Example Of How Owner’s Title Insurance Can Protect You
Here’s another practical example of when homeowner’s title insurance can protect you.
Suppose you find you close on your dream home, and you pay for title insurance, and it turns out that someone sold the property 30 years before to four people, but when the property was sold again ten years ago, only three of the four people signed the deed. This could be an honest mistake, or worse, it could have been deliberate to exclude that fourth person from their share of the property. This scenario can lead to a lawsuit involving these four individuals and you, since you now own the property. Your owner’s title insurance should pay for the cost of defending against the lawsuit.
Lender’s Title Insurance Policy
On the other hand, the lender’s title insurance is almost always required by the lender to protect the amount they lend. The lender will require the buyer to purchase coverage before approving the home loan.
The primary purpose is the same as an owner’s policy: to protect the lender against potential losses if the seller cannot legally transfer property title rights. The lender will be covered up to the loan amount. However, be mindful that only the lender is protected by this policy.
For instance, if you learn that back taxes are owed on the property after closing, a lender’s policy will not protect you. You must have an owner’s title policy.
Are There Alternatives To A Title Policy?
One alternative to a title policy is a warranty of title. It is a guarantee by the seller that they retain the legal right to transfer ownership of the property to the buyer and that no other parties have a claim to the property. If that turns out to be untrue, and someone does have a claim on the property, the buyer will have legal recourse against the seller.
Most real estate transactions have a warranty of title, but not all. For instance, properties sold at auction or estate sales where the seller is not the property owner but rather an agent or representative often do not include a warranty of title. This is simply because the agent or representative is likely not aware of any potential claims to the property.
We strongly recommend purchasing additional title insurance in all real estate transactions, especially those in which the seller is not the property owner.
Limitations And Exclusions Of Title Insurance Coverage
What does title insurance not cover? This is a valid question and concern. Like other types of insurance coverage, title insurance has limitations and exclusions, which will depend on your policy. Your specific policy will explain what is covered and exclusions and limitations.
Some of the most common exclusions used by title insurance carriers to deny a claim include:
- Defects that originated after the sale and issuance of the policy
- Certain taxes and assessments
- Boundary or border disputes between landowners
- Easements or rights of way not recorded on the deed
- Environmental hazards
- Zoning violations
- Restrictive covenants
- Defects that the buyer and insured knew about or should have known about at the time the policy was issued and
- Eminent domain claims by the government.
Similar to other types of insurance coverage, title insurance is not unlimited. If you purchase a specific amount of coverage, your claim will be limited to up to the policy limit amount.
Importance Of Title Examinations And Clearances
Title clearance is the process of performing a title search on the property. The title search is typically performed by a title company whose job is to do just this. Often a real estate attorney will oversee the process and assist if necessary. Once the search is complete, the title company will issue a report providing information regarding past and present ownership and any potential title issues.
The purpose of the search and examination is to determine if there are any old claims against the title to provide an opportunity for the parties to resolve defects and secure the marketable title.
Additional Coverage Options And Endorsements
We strongly encourage our clients to purchase at least basic title insurance coverage. However, there are enhanced policies available should you need or want them.
Enhanced Owner’s Title Insurance Coverage
Enhanced title insurance is exactly as it sounds. It is additional or more advanced coverage to a basic owner’s title policy. It provides more protection in the event of defects or issues.
Enhanced title insurance can offer the following additional protections not otherwise covered by a basic policy:
- Zoning violations
- Liens against the property
- Encroachment onto your property
- Subdivision violations and
- Lack of access to the property.
Every situation is unique, and while most real estate transactions might not require enhanced policies, some can undoubtedly benefit from them. If you are still deciding if you should invest in enhanced coverage, you should speak with a knowledgeable and seasoned estate attorney. They can guide you based on your specific needs and circumstances.
Title Endorsements
Title endorsements add coverage beyond a standard title insurance policy to provide property-specific coverage to your existing policy. Nearly 100 different title endorsements exist to cover virtually every potential buyer concern. Knowing which ones may be pertinent and valuable to you is vital to preventing costly problems and even the forfeiture of your home.
You certainly do not need all 100 endorsements. You can pick and choose to customize your policy and needs. Some are only applicable to buyers, and others to lenders. An estate planning attorney can help you decide which endorsements may suit you.
Some common types of title endorsements to consider include:
- Easement and encroachments
- Survey coverage
- Minerals and subsurface substances
- Access and entry and
- Contiguity endorsement for land that contains multiple parcels in one property.
Customizing title insurance coverage to fit your needs can prevent your worst nightmare scenario later.
What Is The American Land Title Association (ALTA)?
The American Land Title Association (ALTA) was founded in 1907 to represent the title insurance industry. ALTA also focuses on a property’s abstract of title, which ties the title’s history to a particular piece of real estate. Its objective is to improve industry oversight and protect consumers.
Most title insurance companies, title agents, and abstracters who prepare summaries of public records relating to the title of specific land hold an ALTA membership. You can learn more about ATLA and how it relates to title insurance here.
The Bottom Line
Without title insurance, your new dream home can rapidly become a nightmare. Title insurance can provide peace of mind and protect you from preventable financial loss. Choosing the right title company to assist you is equally crucial to obtaining title insurance.
You want to work with a reputable title insurance provider and choose a trustworthy and responsible company. After all, they are playing a massive role in one of the most significant purchases of your life. If you are still trying to figure out where to start, a Tennessee real estate attorney can recommend title agencies they know and trust.
At Batson Nolan PLC, we conveniently have offices in Clarksville and Springfield. Contact us today via email or call 931-650-5484 to schedule a consultation to discuss your specific situation and circumstances at the office convenient to you.