Title refers to both the rights of ownership of a particular property and the documents that prove the existence of those rights. Marketable title means that the property’s ownership, as reflected in the real estate records, has no problems or only minor problems that any well informed and prudent buyer would accept. Any buyer of real property obviously wants and expects to receive clear title to the property. The buyer expects, for example, that the person selling the property has the right to do so, that all of the owners have joined in the sale, that all mortgage and other liens have been paid (or will be knowingly assumed as part of the transaction), and so forth.
Title insurance, as the name implies, is an insurance policy, usually issued for a one-time fee at the time real property is purchased, which insures against title problems. If the property being purchased is secured by a mortgage, generally, the lender will require title insurance in the amount of the mortgage loan. It is important to understand, however, that the lender’s policy or mortgagee policy protects the lender and does not protect the buyer of the property. For the purchaser of the property to have protection, an owner’s policy is required.
The owner’s title insurance policy provides two types of coverage. First, if ownership of the property is contested, the title insurer will defend the title at no expense to the owner and attempt to eliminate the title defect. Second, if it turns out that there is a title defect that cannot be eliminated; title insurance protects the owner from financial loss up to the amount of the policy (which is generally issued in an amount equal to the purchase price of the property).
One alternative to title insurance is an attorney’s title examination of the property. This involves an attorney reviewing the legal history of the property and other relevant federal, state, and county records to determine the owners of record, and the existence of any present or past mortgages, court judgments, probate proceedings, divorces, foreclosures, tax and construction liens, and other matters that could affect title. If the attorney’s title opinion reveals problems, the seller will then be required to correct the problems prior to closing the sale. An attorney’s title opinion will reveal most common title defects and can in some circumstances be less expensive than an owner’s title insurance policy, particularly in cases where the buyer is not required to purchase a lender’s title insurance policy as part of the transaction.
On rare occasions, however, a real estate title may contain hidden defects that do not surface even in the course of a thorough title examination. One example would be the existence of a forged deed or satisfaction of mortgage in the chain of title. In such a case, title insurance would cover the buyer against any loss resulting from the forgery. The purpose of title insurance is to secure the owner’s rights to property and protect the owner from a hidden defect of this nature. If the owner is forced to defend his or her title in court, the insurer agrees to pay the costs necessary to resolve the problem. Many law firms specializing in real estate law are affiliated with title insurance agencies and can issue title insurance policies. This provides the consumer with the best of both worlds, as a title insurer not affiliated with a law firm does not represent the consumer’s legal interests and cannot provide legal advice.
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