What is Title Insurance and Do I Need it? – Video
Kathy: What is ‘Title Insurance’, and what does it cover. Hi, I’m Kathy Fettke, CEO of RealWealth and this is something everybody should get when purchasing a property but most people don’t understand. The account executive from First American Title in Indianapolis, Lara Paul is joining us today to hopefully demystify title insurance. Lara, thank you so much for leading us here today in this module.
Lara: Thank you for having me.
Kathy: Let’s start with a disclaimer about what you need to do to make sure this information is correct for you. Always make sure you discuss anything, any investment with your accountant, tax advisory or attorney and of course past performance is no guarantee of future results. While every effort is made to maintain accurate and current information the possibility of errors or updates always exist.
All right so let’s start with the key lessons: title insurance, what it covers, the difference between the owner and lender policies, and various forms of ownership. Starting with title insurance, what does it cover?
Lara: Okay. Title insurance covers that the buyer is the legal owner of the property, that they’re real access to the property meaning that the property is not landlocked in any way. That the buyer is protected against prior lien in all judgments from previous owners. The property is marketable meaning that when it’s time for you to sell the property there is not going to be any clouds on title.
Also, title insurance will pay for legal difference, so if there is a valid claim, the title insurance company will pay for your legal defense and they will also pay up to the amount of the policy for the claim.
Kathy: Okay, so before moving on, let’s go over some of these items. The buyer is the legal owner of the property. When you purchase a property, why would you not be the legal owner?
Lara: Well, that means there is no prior owner that can come back and state that they have a claim to the property. We’re ensuring that the buyer is the sole owner of the property, so whoever is taking title to the property, we’re ensuring that those are the only people that will be entitled to the property. There will not be anyone coming back from the past stating that they have a claim.
Kathy: Well. there could be but you would protect against that.
Lara: That’s correct.
Kathy: In other words, somebody might have made a handshake agreement and said, “Hey this is grandma’s house and you get to inherit it someday,” but that was never put in writing. The property’s put up for sale, somebody buys it. That person who had the handshake agreement says, “Wait this is my property.” The title insurance would cover you for that.
Kathy: All right. The second one, there is a legal access to the property. I think you said that you can access it physically so are you saying that there might be properties all around it and they’re not giving any access to it and you’d protect against that?
Lara: Yes, that’s correct. We’re going to make sure that the property is not landlocked in any way. Especially in rural areas where maybe there was a roadway agreement and a gravel road. We’re going to make sure that there is access to the property.
Kathy: Okay. The buyer is protected against prior liens and/or judgment. This is so important because again not everybody records their liens or judgment so you might purchase the property, there is a lien or judgment against the prior owner. They come to you and say, “Hey, I’m going to put a lien on this property even though you’re the new owner because I did this work and I wasn’t paid or whatever.” The title insurance would say, “Well, no this is a new owner,” and they will protect you against that.
Lara: That’s correct and also if we were to miss something let’s say we do a title search and missed a judgment, well, that’s on us. We’re going to then go back and claim. That’s one of the reasons that you want to get title insurance, because you may not know if the prior owner has a judgment against them and so that’s one of the things that we research when we do our title commitment. If it was missed on our part then that’s definitely something that we would pay a claim on.
Kathy: Okay, very good because normally that would show up in the title report but in some cases, it doesn’t.
Lara: Yes, and if it was filed wrong at the county or whatnot.
Kathy: Okay, and if the property is marketable, what do you mean by that?
Lara: This just means that when it’s time for you to sell the property, there is not going to be a cloud on title such as a prior judgment or an old mortgage showing up.
Kathy: A cloud on title, would you explain that please? What does that mean?
Lara: A cloud on title would be a judgment from a previous owner, maybe a mortgage that was paid off but never released or a mortgage that was never paid off. Basically that the property is free and clear except for any mortgages or liens that you have taken out against the property as the buyer.
Kathy: It’s basically the opposite of a clear title. A clear title would not have those liens a clouded title would.
Lara: That is correct.
Kathy: I want to make sure people who are new to these terms understand, because we’re not talking about weather. We’re not talking about clear weather on your property or cloudy weather on your property, we’re talking about the Title.
Lara: That is correct.
Kathy: Great, and then legal defense, if there is a valid claim the title insurance company would pay if you have the insurance. That’s right?
Lara: That is correct. We will pay for the legal defense to fight the claim and then if there is a valid claim we’ll obviously pay the claim up to the policy amount.
Kathy: Okay. Most people when they purchase property insurance, they’re almost required by the title company to purchase the insurance but do you sometimes see people who deny that, they don’t buy it?
Lara: Yes. It’s not required that you have to get title insurance on a property when you purchase a property when you’re paying cash. However, if you’re getting a financing on the property the lender is going to require that you have title insurance. Very rarely, I will see a buyer that is paying cash for property maybe at the family member or a friend and they will want us to prepare just a title search but they will not purchase the insurance and then they will deed the property over using a quick claim deed.
However, there’s just a lot of a risk in that. We don’t insure the title search so if something was missed at the courthouse or filed incorrectly that could come back and be a problem. Even if you’re buying from a family member or a close friend they may not be upfront with you on whether or not they have judgment or tax warrant that could possibly be a cloud on title and sometimes I find that people with judgments or tax warrants aren’t even aware that will be an issue on title. That’s why I think it’s always a good idea to get title insurance.