Title Deep Dive
What is a title company and what do they do?
There are two main differences between title insurance and other types of insurance. First, title insurance protects against events that may have happened in the past, while other forms of insurance, such as homeowners insurance, provide protection from future events. Second, with title insurance, there is only a one-time insurance premium paid at the loan closing, while other insurance types typically require ongoing payments of premiums.
Title companies and title attorneys perform title-related services to home buyers as part of the mortgage process. Title companies issue lender’s policies which are required for any mortgage, as well as owner’s policies which are optional when getting a mortgage. They also perform title searches, which are used to determine if there are any existing liens or judgments on a property. Title insurance protects the insured parties from liens/complications related to title and ownership that may come up after closing that was previously undisclosed. More often than not title companies are also very involved in the closing process of your mortgage as settlement agents. They work with the lender in the final stages to ensure that the fees being collected by the county/municipality (property taxes, transfer taxes, recording fees) are accurate. The title company will add in all purchase contract-related fees between buyer, seller, and realtor needed for closing, and they will work to ensure that the transfer of property ownership is properly recorded as a public record.
When a creditor is deciding whether or not to lend money to a buyer for a particular home, it must be certain that there are no liens, judgments, other mortgages on the property, or other individuals buying or selling the home that could take a priority interest over the property. This is called a “clear title”. This determination is important to the lender because lien priority will determine the order in which different creditors are paid when a borrower defaults on a loan or faces bankruptcy. To make this determination, a title company will perform various searches on the subject property and submit their findings to the lender in the form of a title report.
Preliminary title reports list information related to existing liens, easements, defects, restrictions, and any other applicable encumbrances that may cloud title or be exceptions to coverage when the policy is issued. A title report allows the title insurance provider to inform the involved parties of any known conflicts or issues affecting the property and commit to issuing title insurance when specified requirements have been met.
Borrowers are not required to have title insurance, but when purchasing a new home, you should consider its benefits. Title insurance for homeowners is known as “owner’s insurance”, different from homeowners insurance, and it may protect them against potential liabilities such as;
- Mechanics liens (liens filed by contractors when homeowners fail to pay for materials or improvements)
- Mistakes in recording or indexing legal documents
- Unreleased mortgages
- Zoning violations
- Unpaid taxes and assessments
- Unpaid judgments and liens
- Refusal of a potential purchaser to accept title based on the condition of the title
- Other legal concerns related to prior ownership of the property.
For information on how to select a title company, check out our article Selecting Title!