Title insurance is insurance that you buy when you purchase a home or a plot of land. Essentially, title insurance is a guarantee that you are getting the home free and unclear of any encumbrances or limitations on your ownership that you might not know about. When you buy title insurance, it is a guarantee that you know the extent of the ownership interest in the land or property that you are buying, and that there won’t be any unpleasant surprises that will cost you money.
If you’ve ever bought a car, you know that you get a little piece of paper referred to as the “car title.” This piece of paper shows that you are the actual owner of the car and transfers the ownership of the car from someone else (the dealer, the seller, etc.) to you. The title document is not just given to you but there are also copies on file with the Department of Motor Vehicles so that there is an official record of who owns the car.
The ownership history of a home or plot of land is also tracked in a similar way. When an ownership interest in real property transfers from one person to another, title is used to track the new owner. Your name and the name of any co-owners goes on the title and you become the people with the ownership interest in the land.
However, previous owners can only transfer you the ownership interest that they have- they cannot sell you a greater ownership interest in the land than they themselves own. For example, consider a plot of land that has an easement on it. The owner owns the land, but it also comes with the easement. When they transfer the land to you, the easement comes with it. Since their land is limited or encumbered by the easement, they can’t sell you the land unencumbered of the easement because they don’t own the right to do that.
Why Does Title Matter?
When you buy a plot of land or a home or property, you want to know exactly what you are getting and what the extent of your ownership interest is. If there are any easements or encumbrances on the land, you want to know about them. As such, when you make an offer to purchase, a title search is done to ensure that you know what you are getting.
When a title search is done, the goal is to ensure that the house has clean title. In other words, the goal is to make sure that the ownership history of the land can be traced back to determine if the current owners trying to transfer their interest are in fact the real and true owners with no discrepancies about property lines, boundaries, or other issues related to ownership.
In addition, a part of having clean title is making sure that no one has any outstanding claims on the land. For example, consider an owner that didn’t pay his property taxes. That owner might have had a lien put on his house by the IRS (an ownership interest that the IRS takes in the house for the amount of taxes). The owners with the lien on their property could not sell you clean title, because they don’t own the land free and clear- they own the land encumbered by the lien.
A title search should turn up any encumbrances or limitations on ownership of the land- such as these IRS liens or easements or deed restrictions. Some of these encumbrances, such as deed restrictions and easements, would be disclosed and you would simply accept that the land comes with the restrictions. Others, such as the IRS lien, would need to be dealt with so that clean title could transfer with the property.
What is Title Insurance?
Once the title search is done, it is important to make sure that every limitation on the title showed up so you know what you are buying. Title insurance guarantees that it does. When you buy title insurance, it protects against any surprises that didn’t show up on the title search. This means that if it later turns out that there was a lien on the house that no one saw, the title insurance company would pay the costs of taking care of the debt in order to get the lien removed.
Title insurance is required by banks and mortgage lenders, but even if it wasn’t, it is simply a smart choice to make sure you buy protection against any surprises that could cost you if it turned out you didn’t buy what you thought you did when you purchased your home or property.