TITLE INSURANCE PROTECTION
TITLE INSURANCEA Lenders Title Policy will protect the lender in the event that a claim is made against the clear title of the property. Title Insurance Companies underwrite these policies and guarantee that the owner of the property is indeed the rightful owner, that all liens and encumbrances have either been paid off or have been disclosed to the lender who has okayed the lien (as in the case of a 1st lien on the title report where the private mortgage lender is making a 2nd lien) and that all taxes owing on the property to any government taxing authority have been paid or the existence of which has been disclosed and approved by the lender. In addition, the title policy will list all exceptions to the policy (that which the title insurer will not insure against) and any right of ways or easements which may affect the value of the property. The lender's or mortgagor policy, protects the lender for the amount of their loan. If the loan is for $80,000.00 on a property, then the mortgagor title policy will be for that amount only, $80,000.00. This type of policy is called the ALTA policy and is a standard policy approved by the American Land Title Association.It is issued to banks and other institutional lenders. In addition to covering the lender for the losses included in the owner's policy, the lender's policy includes coverage for any losses that the lender would incur if another creditor were first in line. If, for example, the borrower were to take out a second mortgage and had managed to keep this second loan hidden while refinancing the first mortgage, the second mortgage would take first place in the event of a foreclosure action. The lender's title insurance policy would cover the mortgagee of the first loan if this were to occur. Title insurance, both Lender’s and Owner's title insurance, are extremely important when purchasing a house or piece of property. Yet many investors are unsure about what title insurance is and what it protects against. Here are some answers to the more common questions about title insurance. There are two types of title insurance: Lenders title insurance, also called a Loan Policy, and Owner's title insurance. Most lenders require a Loan Policy when they issue a loan. The Loan Policy is usually based on the dollar amount of the loan. It protects the lender's interests in the property should a problem with the title arise. The policy amount decreases each year and eventually disappears as the loan is paid off. Owner's title insurance is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts as long as the borrower or his heirs have an interest in the property. This may even be after the insured has sold the property. Only Owner's title insurance fully protects the buyer should a problem arise with the title that was not uncovered during the title search. Owner's title insurance also pays for any legal fees involved in defending a claim to a title. Prices, and the way title insurance is issued, vary from state to state. Contact a title company in your state to see how it is handled. In order to issue title insurance, the title company must search public land records for matters affecting that title. Many search the "chain" of title back 50 years. Twenty-five percent of title searches find a title problem that is fixed before the insurance is issued. Some examples of items that can cause a problem are: deeds, wills and trust that contain improper information; outstanding judgments or tax liens against the property; and easements. Title companies fix the problems then issue the title insurance. Occasionally, in spite of an exhaustive title search, hidden hazards can emerge after closing. Things such as mistakes in the public record, previously undisclosed heirs claming to own the property; or forged deeds could cloud the title. Owner's and Lender’s title insurance offer financial protection against these by negotiating with third-parties, and paying claims and the legal fees involved in defending the title. Common Title ProblemsHere are three short stories on some common title problems: Fraud & ForgeryThose involved in real estate fraud and forgery can be clever and persistent which can spell trouble for a property purchase. In a western state, an innocent buyer purchased an attractive home site through a realty company, accepting a notarized deed from the seller. Then another couple, the trio owners of the property—who lived in another locale—suddenly appeared and initiated legal action to prove their interest in the real estate was valid. Under the owner’s title insurance policy of the innocent buyer, the title company provided a money settlement to protect against financial loss. As it turned out, the forger spent time in advance at the local court house, searching the public records to locate property with out of town owners who had been in possession for an extended period of time. The individual involved then forged and recorded a deed to a fictitious person and assumed the identity of that person before listing the property for sale to an innocent purchaser, handling moot contracts through an answering service. Also, the identity of the notary appearing on deeds was fictitious as well. Fraud and forgery are examples of hidden title hazards that can remain undetected until after a closing despite the most careful precautions. Although emphasizing risk elimination, an owner’s title insurance policy as well as a lender’s title insurance policy protects financially through negotiation by the insurer with third parties, payment for defending against an attack on the title as insured, and payment of valid claims. Conflicting WillsConflicts over a will from a deceased former owner may suggest a study topic for law school. But the subject can take on a reality dimension and all too quickly your property ownership is at stake. After purchasing a residence, the new owner was startled when a brother of the seller claimed an ownership interest and sought a substantial amount of money as his share. It seemed that their late mother had given the house to the son making the challenge, who placed the deed in his drawer without recording it at the court house. Some 20 years later, after the death of the mother, the deed was discovered and then filed.Permission was granted in probate court to remove the property from the late mother’s estate, and the brother to whom the residence initially was given sold the house. But the other brother appealed the probate court decision, claiming their mother really did not intend to give the house to his sibling. Ultimately, the appeal was upheld and the new owner faced a significant financial loss. Since the new owner had acquired owner’s title insurance upon purchasing the real estate, the title company paid the claim, along with an additional amount in legal fees incurred during the defense. Missing HeirsWhen buying a home, it's important to remember what you don't know can cost you.As an example illustrating the need for precautions, The American Land TitleAssociation pointed to a couple who purchased a residence from a widow and her daughter, the only known heirs of the husband and father who died without leaving a will. Soon after the sale, a man appeared - claiming he was the son of the late owner by a former marriage. As it turned out, he indeed was the son of the deceased man. This legal heir disapproved of his father's remarriage and had vanished when the wedding took place. Nonetheless, the son was entitled to a share of the value of the home, which meant an expensive problem for the unwary couple purchasing the property. Although the absence of a will hindered discovery of the missing heir in a title search of the public records, ALTA said that owner's title insurance issued at the time of the real estate transaction would have financially protected the couple from the claim by the missing heir. For a one-time charge at closing, owner's title insurance will safeguard against problems including those even an exhaustive search will not reveal. ALTA reminded that owner's title insurance is necessary to fully protect a home buyer. Lender's title insurance, which is usually required by the mortgage lender, serves as protection only for the lending institution. When originating a new loan, the lender will require title insurance. Even in the case of recently purchased real estate, there are some problems that could arise with the title. For instance, the property owner might have incurred a mechanics lien from a contractor who claims he/she has not been paid. Or the property owner could have had a judgment placed on his property for unpaid taxes. The lender wants to make sure the title to the property they are financing is clear.New construction raises special title problems for the lender and owner. You may think you are the first owner when constructing a home on a purchased lot. However, there were most likely many prior owners of the unimproved land. A title search will uncover any existing liens and a survey will determine the boundaries of the property being purchased. In addition, builders routinely fail to pay subcontractors and suppliers. This could result in the subcontractor or supplier placing a lien on your property. Again, lenders want to be sure the property has clear title, and they are insuring the correct property. Purchasing owner's title insurance will protect you against these potential problems and pay for any legal fees involved in defending a claim.Closing your loan can vary from state to state, and even within the same county or city. Settlements can be conducted by lenders, title insurance companies, escrow companies, real estate brokers or attorneys. Be sure to ask your Realtor® how your settlement will be handled.
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