What is Title Insurance & Why do I need it?

After signing a real estate contract to purchase property, but prior to closing, close to all attorneys located in the United States will order a title report which is needed in order to obtain a title insurance policy at the real estate closing.

More often than not, when acting as a purchaser’s counsel, I am asked, “what is the title report and why do I need a title insurance policy?”

The title report will contain a title search, which is an examination of public records to determine a property’s legal ownership and to determine whether or not there are any legal claims to the property made by; (1) other parties (2) defective recording and/or record keeping, and (3) judgments against the property from an outstanding judgment or law suit.

A situation where another party may have a legal claim to a property which someone else thought they owned can occur when there is a publicly recorded lien that gives another party a claim to money from the subject property. An example of such a lien is a mortgage. A mortgage lien will only be extinguished by payoff of the mortgage and a satisfaction recorded. Transfer of title does not extinguish the mortgage and therefore, if not extinguished by the recording of a satisfaction, the purchaser would be responsible for the seller’s mortgage.

In the case of defective recording of a deed or mortgage satisfaction;  homeowners can find themselves in a bad predicament if they were to discover  that due to a clerical error; the deed presented at the real estate closing was defective and could not be recorded or there was a defective deed or mortgage satisfaction in the chain of title.

A judgment against the property can occur when a creditor obtains a money judgment against a debtor and then files a real estate lien in the county clerk’s office against the debtor’s property. Once recorded, the lien notifies whomever is searching, that the property owner owes a creditor money. This, also, would not be extinguished by transfer of the property, and would become a new owner’s problem if not taken care of; at or before the real estate closing. The same is true if taxes of any kind are owed.

Any lien, unpaid taxes, or judgments raised against a seller would be stated as an exception in the title report under Schedule B. Not all liens are created equal. Different types of judgments and liens, each have their own expiration periods. For example, the statute of limitations on a memorandum of judgment is seven (7) years as opposed to a New York Tax Lien that only expires after 20 years, or a Uniform Commercial Code (UCC) lien which depending on the purpose of the UCC has different expiration periods.

It is important to have a knowledgeable attorney review the title report in order to determine whether or not there are any exceptions raised in the title report which can hinder a transaction; and if there are, how to clear the exception.

Once the purchaser’s attorney receives the title search, he/she will work with the title company and seller’s counsel to clear any open title exceptions, so that at the closing, the purchaser can receive an insurance policy with clear title, ensuring that there are no claims to contest its ownership in the property.

At the New York real estate closing, the title company will generally send a representative to provide the title policy. There are two types of policies; Homeowners and Loan. The Loan policy is for the lender while the Homeowner is for the property owner.

The loan insurance policy, which the home purchaser must pay for, albeit at a discounted price, is based on the dollar amount of the loan and only protects the lender’s interests in the property should a problem with arise. The policy provides protection for the lender, namely that; (1) The person giving the mortgage owns the underlying real estate, (2) the person who owns the real estate has the authority to convey a mortgage interest, and (3) the mortgage is a lien in the first priority. The lenders title insurance  policy does not protect the homeowner’s investment in the home. The lender’s policy only covers claims that the affect the lender’s loan.

The insurance policy which protects the home owner is the Owner’s Policy. This policy protects the homeowner when the house is refinanced or sold and/or if someone later sues the homeowner saying they have a claim against the property. The Owner’s policy protects the current owner from financial loss sustained from defects in title to a property prior to current ownership. Title insurance companies will defend against a lawsuit of someone attacking the title or reimburse the title holder for the actual monetary loss incurred up to the dollar amount of insurance provided by the policy.

In summation, title insurance is extremely important for the property owner. Purchasing a property is generally an expensive and major expenditure. Purchasing a title policy, is a way to make sure that you know exactly what you are purchasing and to protect the property owner in case there is a claim made against the property.

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