You’re probably now aware there are more than a few services needed when your mortgage lender begins processing and approving your mortgage loan application.
Most of these services you’ll never use again unless and until you apply for another mortgage to purchase another home or refinance an existing one. Some of these services you might know what they’re for and some maybe not so much.
For instance, your lender will need a credit report and will order one from a credit reporting agency. Obviously the lender wants to see how you’ve paid your bills in the past and it’s not the first time a business has reviewed your credit report. An appraisal is ordered and used to establish a market value for the home. Yet there are other third party services you probably haven’t used before unless you’ve previously applied for a mortgage.
Title insurance is one of them. What is title insurance and why do you need it?
What Is A Title?
Legally, a title is a record of ownership in the property and lists all entities that have a legal interest in the property. When a buyer purchases a home, the buyer is listed as a legal, recognized owner of the property. There can be multiple parties listed as having a legal interest in the subject property. A husband and a wife. Domestic partners. Family members. A Trust can hold title. There are different ways to hold title and they all have their own requirements and depending upon the entity acquiring the property, title must be held in a specified manner.
Sole Ownership is a form of title which indicates a single person owns a complete interest in the property. Should the owner pass away, the interest in the property is included in the estate. If there is no will, ownership will be determined by a probate judge. Joint Tenants own equal, undivided interest in the property. Joint tenants are two more or people on title.
When the owners are legally married according to the laws in that state and one of the spouses dies, the entire amount of the ownership of the deceased spouse transfers to the surviving spouse. If the tenants are not married but take title as joint tenants, the property will go through the probate process similar to holding title as a sole owner. Joint tenants can take title in this manner as long as each owner has the same amount of interest in the property and take ownership at the same time.
Joint Tenants with Rights of Survivorship is joint tenancy which transfers ownership equally to other joint tenants and does not pass ownership to the deceased’s heirs.
Tenancy in Common is similar to joint tenancy yet the interest divided among those on title may be different. Tenants in common are not legally married and each tenant must indicate with a will who will receive the owner’s interest in the property should the owner die.
What is Title Insurance?
Title insurance is in fact an insurance policy and protects ownership due to previous claims or otherwise unrecorded claims of ownership made prior to the home being purchased.
Here’s an example.
Let’s say a couple gets married and take title as joint tenants. At the settlement table, the seller of the property previously paid for a title insurance policy. A few months go by and everything is fine. Yet they soon get a certified letter stating they do not in fact own the home and there is an owner not listed on the title report claiming ownership. The individual claiming ownership was married, got divorced and now wants to be compensated or else there will be a lawsuit filed forcing the couple to pay up.
This is what is considered a clear defect in title. There appears to be a legitimate claim of ownership yet somehow the interest was conveyed yet not properly recorded. Because of the title insurance policy, the policy settles the claim and protects the couple from having to compensate anyone.
Title insurance protects all those with a legitimate, legal interest in the property from fraud, forgery or any previous easements or encroachments. Title insurance isn’t an option if there is financing involved. Your mortgage company will require a title insurance policy be in force at the time of closing or else there won’t be any closing. When a sales contract is signed, one of the first functions a mortgage company performs is to order a preliminary title report. This preliminary report will show all previous owners as well as the transfer of the property between buyers and sellers over the years.
The report will also show the recording of previous mortgage liens. If there were any delinquent property or income taxes in the past and a lien was filed, the lien will show up on the report. Any previous liens and claims of interest in the property must be settled prior to your closing.
If there is a questionable lien that cannot be resolved, the lender will work to help get the lien cleared. Sometimes the lien cannot be cleared but the lender decides to go ahead and accept the existing lien yet not insure that particular defect but against all other claims.
Here in Southern California, the title insurance policy is customarily paid and selected by the sellers. What that means to buyers is there is no ability to shop around for title and escrow services as those have been previously selected. From the lender’s perspective as it relates to estimating closing costs, the actual numbers may be slightly higher or lower depending upon the company chosen.
When owners refinance an existing mortgage, a new policy will be issued in accordance with lender requirements and the title insurance company is selected by the lender. Title insurance for a refinance will typically be lower compared to the policy issued when the property was first acquired, often referred to as a “reissue” of title. Depending upon the length of time from the original purchase to the refinance, the title insurance rate will vary.
Finally, you’ll notice on your cost estimate there are two types of title insurance, a Lender’s policy and an Owner’s policy. The lender’s policy is based upon the loan amount and protects the lender’s interests should a problem arise.
An owner’s policy is based upon the purchase price and is a one-time fee which protects the owners against potential claims. Common owner claims include previous fraud or forgery. Title insurance is indeed one of those fees you’ll never use outside of a mortgage loan and in most cases title is transferred from buyers to sellers cleanly and properly. However, when title insurance is needed, you’ll be glad you had it. And so will your lender.
