So what exactly is "title insurance?" Well, when a property is financed, bought or sold, a record of that transaction is generally filed in public archives. Likewise, records of other events that may affect the ownership of a property, like liens or levies, are also archived.
When you buy title insurance for your property, a title company searches these records to find - and remedy, if possible - several types of ownership issues. First, the title company searches public records to determine the property's ownership status. After this search, the underwriter will determine the insurability of the title.
Even the most skilled title professionals may not find all problems associated with a property, though. Some risks, such as title issues due to filing errors, forgeries, or undisclosed heirs, are difficult to identify. So after the title company finishes its searching, it also provides a title insurance policy that will help protect you from a variety of issues that might be uncovered later.
If you take out a mortgage loan when you buy your property, your lender will require a loan policy of title insurance. This protects the lender's interest in your property until your loan is paid off or refinanced. On the other hand, an owner's policy of title insurance insures your ownership rights to the property. Even though you'll pay for this policy only once, your coverage will last as long as you own your home.
A real estate purchase may be the largest financial investment you ever make. So, when you buy an owner's policy of title insurance, just think of it as buying some peace of mind!
An Important Investment
Real estate has always been considered one of our most valuable possessions. It is so basic a form of wealth that many special laws have been enacted to protect ownership of land and buildings. You should realize, however, that whenever you buy property, the owner who is selling it to you has extremely strong rights as to his or her family and heirs. And, there may be others who have rights to the property you are buying, such as governmental bodies, creditors, contractors - or other persons could have valid claims against the seller or a previous owner which may have vested, or could in the future vest, against the property you are buying. In a sense, anyone who has such a claim is or could become an owner or part owner of your property. The property may be sold to you, or could have been sold by a previous party in the chain of title, without a person who has such a claim knowing about the sale, or, even with the fraudulent intent to keep such a person from knowing about the sale. And neither you (nor a previous buyer) may know about the claim at the time the purchase. And, the claim could remain attached to the real estate you have purchased.
Getting a Clear Title
It is of the greatest importance that you get a clear title to your property. To get "clear title" to your property, you must be informed about as many of the known potential claims against your property as possible so that you can make certain they are cleared before your settlement. However, even if all known claims are cleared, you still must be protected against those undiscovered claims that could arise in the future and then threaten your title to and possession of the property. Title insurance informs you of the known potential claims against your property and provides you protection against the unknown, undiscovered claims.
Claims Against or Defects in the Title
Learning what claims may exist against the property begins with a search of public records - this is also the first step taken to insure your title to the property. Some of the questions a title search answers, and issues the search raises, include the following:
The public land, court and tax records are searched for such defects in the title and restrictions on use of the real estate you wish to buy, and reported as part of preparation for your closing. Known defects discovered must may be corrected or cleared before settlement.
Existing liens must be paid and released, unless you are assuming a loan or taking the property subject to an existing lien. And, you must be properly informed of the existence restrictions on your use of the property.
This search, and its results, are the first benefits you receive from the title insurance process. Suppose there is a defect in the title which doesn't show up in the public records? This can happen. It is called a "hidden risk" - an undiscovered claim which could arise long after you have purchased the property. Examples of hidden risks include fraudulent transactions, omitted heirs and erroneously recorded liens, to name just a few. The title to the property which you have paid for - and to which you have received a deed - could be seriously threatened or completely lost by such circumstances as forgery, confusion due to similar names or errors in the records - and in many cases, there is no statute of limitations to cutoff potential claims. Protection against loss from "hidden risks" against your real estate, which cannot be discovered by even the most diligent examination of the public records, is the second of the two benefits which title insurance provides.
The Need for a Survey
An additional area of potential title problems is the location of "improvements" (Legaleze for buildings, fences or other structures) on the property. The precise location of these improvements and their relationship to improvements on properties adjacent to your property can only be discerned through a properly conducted survey of the property. If the property is a condominium unit, a survey is unnecessary. Title insurance will apply only to your ownership interest in your particular unit, not to the land upon which the condominium structure rests.
For other properties, however, a survey is an indispensable part of assuring that the improvements on your property do not violate any governmental or private restrictions, that there are no boundary-line encroachments of improvements from your property to adjacent lots or lands, or that improvements from adjacent properties do not encroach on your property.
If a survey is provided to the title insurer along with the title examination, your owner's title insurance policy (must be extended coverage or First American Eagle Policy) will insure against such past encroachments or claims of set-back or restriction violations.
If a claim is made against your title, and you are an insured owner, the title insurance company protects you by --
If such a claim is made, and you have a mortgage loan on your property which is covered by title insurance, the title insurance company will also defend the title as to the lender's interest and pay any loss the lender may suffer as a result of the claim.
There are two separate and distinct types of title insurance policies: (i) the lender's or loan policy; and, (ii) the owner's policy. In addition, in most instances you will have available to you an option of "extended owner’s coverage" (i.e., Eagle Policy) if you purchase an owner's policy. More about that later.
Mortgage lenders, almost without exception, require you to purchase a lender's title insurance policy to protect the lender's investment in your property - the loan. However, the lender's policy insures only the lender against title defects that might affect the security of the mortgage loan - the lender's policy does not insure you or your interest in the property.
With lender's coverage only, if there is a claim against your title, the title insurance company will only defend the lender's interest in court and will only bear the cost of settling the claim for the benefit of the lender. In addition, a lender's title insurance policy is generally only in the amount of the mortgage and it decreases as the mortgage is paid. You should consider owner's title insurance to protect your own ownership - for as long as you and your heirs own the property, even if you initially have only a small amount of equity in the property to be insured.
Your equity will increase as time goes by, plus if there is a claim made against your title, the amount of equity is irrelevant in determining whether a legal defense should be undertaken on your behalf - and if you don't have owner's coverage, the title insurance company will not defend your interest. If your have owner's coverage, the title insurance company will defend your interest - regardless of the amount of equity you have in the property, and bear the cost of settling the claim as to your interest - as well and
the lender's security interest in the property.
Your policy should be for the full amount you paid for the property - not just the mortgage amount. At the time of refinancing your mortgage, if you have not previously purchased an owner's policy, one may be purchased for the appraised value or tax-assessed value of the property. In addition, most title insurance companies offer an inflation protection endorsement for your owner's policy for a nominal additional premium. Such an endorsement will automatically increase the face amount of your coverage as the value or your property increases. In addition, optional extended coverage is generally available at a premium equal to 120% of your basic policy premium.
Finally, if you secure an owner's policy at the same time your lender orders its mortgagee policy, your policy premium will be substantially lower than if you were to purchase only owner's coverage for the property.
A word about extended coverage, or Eagle Policy: Your owner's title policy (and the lender's policy) provide insurance against defects or claims which may occur relating to the chain of title prior to your ownership. The optional extended coverage expands your insurance to cover a number of important "post-policy" risks, including mechanic’s liens, encroachments from neighboring properties, forgery, structural damage to improvements from mineral extraction and building code violations. The extended coverage option also
provides living trust coverage and includes automatic increases in coverage to 150% of the initial base amount.
Only One Premium - Title Insurance Premium Rates
Unlike most forms of insurance, you pay for a title insurance policy just once! Your owner's policy stays in effect indefinitely, protecting you against future claims even after you have sold or transferred the property. Your loan policy will stay in effect until the loan is paid off. When you refinance, you must secure a new lender's policy; however, when you refinance, you will pay a substantially reduced rate for the new loan policy.
Loan Policy - Original Issue Rates
A loan policy will not be issued for less than the principal amount of the deed of trust debt, but may be issued for an amount up to 25% in excess of the debt to cover interest, foreclosure costs, etc.
A loan policy expires with the payment or satisfaction of the deed of trust described in the policy, except when satisfied by foreclosure or other lawful means of acquiring title in settlement of the deed of trust debt. In those cases the lender continues as an insured party until the lender no longer has an interest in the property.
The premium rates for original first deed of trust title insurance are as follows:
Original Issue Loan Policy Rates
Per $1,000.00 Up to $250,000 of liability 3.05
Between $250,000 and $500,000 add 2.84
Between $500,000 and $1,000,000 add 2.42
Between $1,000,000 and $2,000,000 add 1.95
Between $2,000,000 and $5,000,000 add 1.58
Minimum premium 250.00
Loan Policy Refinance Rates are 70% of the above shown original loan policy issue rates.
When a deed of trust is extended or modified, an endorsement to the original policy may be purchased at 50% the original loan policy rate. Loan policies for second trust loans are computed at first trust rates, with a simultaneous issue fee of $150.00 if done at the same time as the first trust.
Owner's Eagle Policy - Original Issue Rates
Per $1,000.00 Up to $250,000 of liability 4.92
Between $250,000 and $500,00 add 4.67
Between $500,000 and $1,000,000 add 4.29
Between $1,000,000 and $2,000,000 add 2.83
Between $2,000,000 and $5,000,000 add 2.52
Minimum premium 250.00
Dual policy fee 200.00
Owner's Standard Policy - Original Issue Rates
Per $1,000.00 Up to $250,000 of liability 4.10
Between $250,000 and $500,00 add 3.89
Between $500,000 and $1,000,000 add 2.57
Between $1,000,000 and $2,000,000 add 2.37
Between $2,000,000 and $5,000,000 add 2.10
Minimum premium 250.00
Dual policy fee 200.00
Substantial savings are available when purchasing owner's and lender's policies at the same time because when owner's policies are issued, there is no additional premium charge for issuing loan policies up to the face amount of the owner's coverage. There is, however, a simultaneous issue policy fee of $150.00 for each additional policy issued.
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