South Bend / Mishawaka, IN – The process of buying or selling a home involves a number of costs to both the buyer and the seller. One of those costs, that generally is a cost of both the seller and the buyer, is title insurance. The question may arise as to what, exactly, am I receiving when I buy title insurance and do I really need it.
1. What is title insurance?
Title insurance is insurance which protects real estate owners against losses or damages they may suffer because of problems with defects in the title to the property or because of other liens or claims which are related to the property they bought. When a title insurance policy is ordered, the title company will perform a title search of the real estate records relating to the property as well as a search of the judgment records in the county of the property owner. If there are title defects or liens or other defects these will generally show up in the title search. Then those liens/title defects can be released or resolved before you close on the sale. If they can’t be resolved you may decide to call the sale off.
2. What kinds of title defects, liens or encumbrances may be found?
A. Title defects: The seller may not actually be the “owner” of the home. The seller may believe that he/she is the current owner but the title records may show otherwise. For example, there could have been a divorce, after the property was originally purchased, but the real estate records were never corrected to reflect the division of property. The seller might be a person who believes she inherited the house upon her mother’s death but a probate estate was never opened. In these situations documents will need to be obtained and recorded prior to your purchase in order to clear the title as to who is the lawful owner.
B. Liens, encroachments, easements, etc.: A title search will generally reveal any liens on the property, such as mechanics liens, liens for unpaid taxes, liens for judgments against the seller. It will reveal easements on the property and other items that somehow “encumber” the property. Judgments, liens, delinquent taxes will need to be released and/or paid before the sale to you occurs. Easements may not cause any issues but it is good to know, in advance, if the prior owner has granted easements to neighbors or utility companies and the location of those easements.
3. What is the difference between an Owner’s Policy and a Lender’s Policy?
The Lender’s Policy is an insurance policy that will be owned by your Lender. If the title company failed to detect a defect in the title or an encumbrance on the property and that results in damage to the Lender, the loss to the Lender will be covered by the insurance policy. Generally the buyer pays for the Lender’s Policy and your Lender will require the policy before making the loan.
The Owner’s Policy is an insurance policy that will be owned by you, the buyer. It will insure damages that you incur as a result of defects in the title. In Indiana, the seller generally pays for the Owner’s Policy but sometimes the seller and buyer reach a different agreement.
4. Are both policies necessary?
Yes. Assume there was a “defect” in the title in that the seller represented that her spouse was dead and sold the property even though it was in both their names. But her spouse wasn’t dead and a few years later discovered that she sold the house without his signature. If the sale was ruled invalid, the lender’s policy would cover damages to your lender but would not cover damages you would suffer if you were required to move out and buy other property. You would hold a claim against the deceptive seller but recovery from her may be difficult.
If both policies are purchased at the same time, and through the same title company, there will be a break in the cost so it is advisable to coordinate the policy purchase. And, again, in Indiana the Owner’s Policy (which will insure you, as the buyer) is usually paid for by the seller.
5. Is there anything special I should request when the policies are purchased?
A. Ask that the “standard exceptions” be deleted. The standard exceptions are a list of 4-5 exceptions that the title company sets forth as exceptions to the coverage. In other words those items will not be covered by the title insurance. As an example, if work has just been performed on the home, but not paid for, there is still time for the mechanic to file a lien (even after the home is in your name). The mechanic can then enforce the mechanics lien on the property. The lien will not show up when the search is done, so title companies will generally not want to cover this risk. But title companies will generally remove the standard exceptions from the lender’s policy so the lender is fully covered. In St. Joseph County, Indiana (which includes South Bend, Mishawaka, Granger and other nearby areas), generally the title companies will not remove the standard exceptions from the owner’s policy in the case of residential property. (Generally they will do so for commercial properties). But, it is best to ask for the standard exceptions to be deleted even if only the lender’s policy, ultimately, has the standard exceptions removed. In order for the title company to remove the standard exceptions, the seller will be required to sign an affidavit stating, among other things, that no costs for work that has been performed on the real estate remain unpaid. Likewise, other representations are made in the affidavit regarding ownership and possession of the real estate which may be helpful if issues arise after the purchase.
B. Ask to see a copy of the title search a few days before closing. Otherwise you will be at the closing table with stacks of documents in front of you, with no actual opportunity to review them in detail. If you obtain the title search a few days before closing, you can review it. If there are easements you can ask for copies of the easements so you know exactly where they are. You can review any exceptions to the title insurance and have an opportunity to ask questions. If there are any liens or judgments you can resolve these prior to closing so that you are comfortable that you are getting a clean title at the time of closing.