Title Insurance – What’s it all about?

Buying a home is the largest investment most people will ever make. Of course, you will obtain homeowners insurance to protect against major losses due to property damage. You will also need title insurance, which protects against any unknown problems with the title you receive to your home.

The collective term “Title” is used to describe your legal rights to own, possess, use, control or dispose of your home. Buyers new to Arizona and coming from the East Coast will find the home buying process here differs from the process they are accustomed to, which often requires the involvement of an attorney in the closing process. The East Coast attorney may handle the title search and issuance of an opinion of title, which is the equivalent of title insurance used in most of the country. Attorneys are not a part of the home purchase and sale process in Arizona, unless there are unusual complications.

Once your offer to purchase your new Tucson home has been accepted, and prior to the mortgage company providing funds for the closing, the escrow will order a title search. The title search is the process in which a title company combs through the public record for any defects or encumbrances during the chain of title over the years that would put the lender at financial risk, put the borrower at financial risk, and/or provide evidence against the sellers’ legal right to sell the property. The lender will not provide funds to complete the purchase of the property without a loan title insurance policy, and the policy will not be issued without a comprehensive title search.

The Title Search

The title search looks for such issues as a disputable chain of ownership, unpaid state or property taxes by previous owners, an undisclosed claim from an heir of a former owner, an easement to the power company to install a power line on your property, and mechanics/contractors liens. Aside from providing evidence to support the issuance of the title insurance policy, the title search provides an opportunity for the title company to assist those involved in resolving any blemishes to title they may discover, in effect clearing the way for a clean transfer of ownership. Once the title search is complete and it is determined the title is clear of any encumbrances, the lender can make a loan with confidence and the borrower may also rest assured there will be no financial risk assumed due to previous owners.

Title Insurance- Lenders and Owners

There are two types of title insurance policies to consider. One is a lender’s policy (also known as a “loan” policy) and the other is an owner’s policy.

A lender’s policy protects the lender’s investment by paying the mortgage in the event that a title defect voids the owner/buyer’s title to the property. Typically, a lender’s policy does not represent the full property value and the amount of policy protection decreases as the mortgage balance decreases over the life of the loan and terminates when you pay off the mortgage.

An owner’s policy protects the landowner/homeowner against the specific types of claims listed in the policy, usually purchased to cover the full property value. While lenders generally require a lender’s policy as part of the real estate transaction, an owner’s policy is usually optional. An owner’s policy protects against any title loss, which insures the value of the property and lasts as long as you or your heirs retain an ownership interest in the property.

You might be wondering why title insurance would be needed for the lender or new owner if a title search has been conducted and the title was found to be in the clear. Sometimes title problems occur that could not be found in the public records or are inadvertently missed in the title search process. Examples of these issues include:

  • Errors or omissions in deeds
  • Forgeries
  • Undisclosed heirs
  • Lack of mental competence

In addition to title loss coverage under a lender or owner policy, a title insurer must also pay for all costs associated with defense against title challenges and, if unsuccessful, the title insurer must also pay for any reduction in land value as result. You pay for an owner’s policy only once, at the close of escrow, so there are no continuing monthly premiums. In Arizona, typically the seller pays for the standard owner’s coverage as part of the closing costs.

If you have further questions about title searches or title insurance, please call Team Al and Sandy at (520) 488-6088.