When you buy a house, or you sell your house, you might hear something about title insurance. For some home sellers and home buyers, this can be a bit confusing. After all, we don’t insure the title to our car, how can we insure the title to our home? It’s a very important part of buying a house. It’s not just important to buyers. If you are selling your house, you could find your sale delayed because of the process needed for the title insurance. It’s good to understand it.
Your Home Title
A title is a document that shows that you own your house and the property it sits on. If you’re the buyer, that the home seller really owns the property. Sometimes, this can be more confusing than you might think. The mortgage company is going to be looking for a continuous chain of ownership to the property. They want to know that there is a record of who owned the property and that each person or entity had the right to sell it.
Unfortunately, sometimes, this chain isn’t very clear. Perhaps ownership wasn’t clearly transferred or the proper paperwork wasn’t filed or signed. There are several scenarios. Events like bankruptcies, inheritances, and other common events sometimes create these situations.
Other times, a previous owner may have had a lien against them for things like taxes, unpaid contractors, or mortgages. When this happens, if that lien isn’t properly cleared, it can create problems for the home buyer.
The Title Search
Title companies and attorneys will do searches when someone is buying a home. They will confirm this chain of ownership and clear up any defects. A defect is one of the industry terms for these issues. This might involve something as simple as filing paperwork. Sometimes, it gets involved and they could have to contact a previous owner, mortgage company, or lienholder.
This is part of the delay when selling you home between the time when an offer is accepted and the closing. It involves going through records, which are sometimes in paper at a local town hall or city hall. These days much of it can be done on-line, which does help. Given how old houses can be, though, sometimes this process is involved.
Common Title Problems
Normally, title problems are minor and can be fixed with some work and time. Here are some of the common title issues
- Mechanic’s Lien – These are liens filed by a contractor. They have to go through the courts to get one filed but it’s usually not too difficult. What often happens is that the house seller resolved the issue with the contractor but the contractor never cleared the lien.
- Child Support Lien – A divorced spouse can file a lien for failing to pay child support. Similar in concept to a mechanic’s lien and it has the same problems.
- Tax Lien – This might seem like a pattern. Governments can, and will, file a lien for not paying taxes. Since they get to collect their money first, before a mortgage company, the mortgage company will definitely want this cleared up.
- Inheritance Issues – If a house has been passed down when someone dies, occasionally there will be issues of missing heirs or unidentified heirs. Occasionally, ownership of the house is broken up and the title and ownership become very confusing. Suddenly, when you are trying to sell your house, a missing heir shows up and claims to own the house.
- Clerical Errors – Sometimes problems occur in how paperwork is filed. These might be missing signatures or forms not filled out properly. Occasionally, someone forgets to file a title change.
- Boundary and Survey Issues – When you start looking at the paperwork for a house that you are selling or buying, you might notice a strange and complicated description of the property on the paperwork. This is a lot different than the simple address we are used to seeing. This is because you can add to or remove part of your property without the address changing. Everyone wants to be clear on what they’re selling, buying, insuring, and loaning money for. Sometimes, issues happen with these boundaries and that creates confusion about the property.
These are the most common issues. Sometimes there are issues with things like forgeries and fraud. These are rare, thankfully.
How Title Problems Are Often Fixed
While there are a few horror stories out there of title issues at the closing table, most are solved by one of three means, which usually means filing paperwork. Sometimes that paperwork needs to be filed by someone else, like a mortgage company or previous buyer. That can delay things but isn’t usually too difficult or expensive.
This can mean having to ask a previous lienholder to release the lien. You might need to have the title paperwork corrected. Something called a quitclaim deed can help to clear up ownership. It’s often a paperwork exercise and not a big deal.
These searches aren’t perfect. It’s not common, but in an extreme position, a person could buy a house and later find out that they don’t legally own their house. Then it can cost thousands of dollars to fix the issue. On very rare occasions, it can’t be fixed. This is where title insurance is great to have. That works out well because a mortgage company will typically require it. It’s a good idea even if you are buying in cash.
Unlike most other insurances, title insurance is retrospective. This is a fancy term meaning that it insures things that have happened in the past. Title insurance provides you protection for issues that weren’t detected in the title search. This way, if something is found, later on, the insurance is designed to protect you.
Thankfully, this is rare. So rare, that some think it’s a scam and shouldn’t be so prevalent. If you have title issues, you might think otherwise. A title issue down the road could cost you your house if you don’t have insurance. At a minimum, it will often cost hours of stress and thousands of dollars in legal fees. When that grandson of an owner from 70 years ago shows up with a claim on your house, you’d be happy to have it. Such issues are rare, but they do happen.
Title Insurance – A Requirement
Regardless of how you feel about title insurance, it’s often required by a lender. It’s also one of those surprise costs that show up at the closing table. It’s worth knowing about and expecting it. It can be thousands of dollars to buy and the title search can take several days or weeks before you can close. Be prepared.