In the process of purchasing a new home, you will likely hear the terms Title Search and Title Insurance. Like all insurances, Title Insurance is a layer of protection for you and your lender, since they have a vested financial interest in your new home.
Other forms of insurance, like health and vehicle, provide coverage for future events that may occur. You pay a premium, and when an issue arises, you make a claim and are covered – in an ideal world.
Title Insurance provides that same protection.
You’ve heard the horror stories:
A young couple buys their dream home at a lower price, only to be visited by the Sherriff in the middle of the night. The young couple made their down payment, filled out all of the paperwork, and did everything on their end that they were supposed to. As it turns out, the ownership of the house is in dispute. Also, the seller didn’t have the necessary legal rights to sell the young couple the house.
You buy your dream home. You make your monthly mortgage payments that include your principal, interest, taxes, and insurance. When it comes time to pay your property taxes, you’re sent a huge bill that your funds in escrow won’t cover. As it turns out, the seller owed a substantial amount of money in property taxes and never disclosed this fact in the buying/selling process, and it never came up in your title search.
These aren’t urban legends. They’ve happened, and are why we have Title Insurance.
In both cases, the purpose is the same: To have a layer of protection for any defects or issues that may arise from past actions:
During a Title Search, the Title Company or specialized attorney, searches for any occurrence of issues like these. However, a title search is not infallible. There are always cases of mis-filed paperwork, or claims that may eventually find their way back to the surface. When this happens, the responsibility for such issues does not rest on the seller, but the current owner.
If a seller owes property taxes on a home, and the sale of the home is successfully complete, the new homeowner becomes responsible for those unpaid delinquent taxes. If they’re not paid, new homeowners can lose their home. The purpose of Title insurance is to cover those unpaid taxes so that new homeowners don’t become homeless. The same applies to liens our outstanding lawsuits that are not disclosed by the seller, or which may not have been found during a title search.