If you’ve ever purchased a house that was secured by a mortgage, you likely hold a title insurance policy for the property. Title insurance protects lenders and new homeowners from financial losses due to a defect in title. Each transaction usually has two policies: 1) a lender’s policy to protect the interest secured by the mortgage; and 2) an owner’s policy to protect the interests of the new homeowner.
Title insurance is common on most residential transactions and almost every transaction involving a mortgage will require a lender’s policy at the very least.
Initial Title Search
How does the title insurance underwriting process work? It’s pretty simple. First, the underwriter will conduct an initial title search of the property to reveal anything that may be filed against the property. This includes mortgages, liens, easements, life estates, deeds, and numerous other documents. The results from the initial title search will be used to put together the next piece of the puzzle: the title commitment.
Title Commitment
A title commitment states the essential items that are needed to issue a final title policy. Is there a mortgage that needs to be paid off? If so, a release of the mortgage will need to be recorded before issuing a final title policy. Was there a tax lien filed against the property? If so, in order to issue a final title policy, the tax lien will need to be paid off. What if there’s a valid easement on the property? The easement will need to be listed as an exception to the final title policy as well as any additional prior recorded encumbrances.
If the title underwriter is also acting as escrow agent for the transactions, there may be additional requirements. If the seller is represented by a power of attorney, that form will be required to be produced. If the seller is a trust, the escrow agent may require a Certificate of Trust and/or a Letter of Direction.
Later Date Title Search
So long as closing goes well, the next step in the process is a later date title search. This search reveals whether or not the items of concern from the title commitment have been addressed. If the item remains outstanding, it can still be listed as an exception to the final title policy.
Title Policy
The title policy is the last step in the process. The title policy provides coverage according to the terms set forth in the title commitment. It lists the covered risks, exclusions/exceptions to the policy, and conditions for the filing/payment of a claim against the policy.
Title insurance is common on most residential transactions and almost every transaction involving a mortgage will require a lender’s policy at the very least. If you don’t purchase an owner’s policy, you’re exposing yourself to a large risk and liability. Due to the relatively low costs compared to potential damages, a title insurance policy is recommended for every parcel of real estate.