Tuesday, April 22, 2014

Understanding Title Insurance & Why it's Necessary

Recently a client of mine contacted me after reading a news story about a Title Company CEO that committed suicide after an investigation was started into missing escrow funds in his company.  I helped this client purchase an investment property and the Title Company the listing agent used had a similar name to the Title Company mentioned in the story.  My client was concerned that it might affect the Title Insurance Policy on her recent home purchase.  Fortunately this was not the Title Company that was used in her transaction.  Although, even if it had been, the insurance policy was still in effect.  The gentleman in the article above was being investigated for embezzling escrow funds.

Her question prompted this blog post which will cover Property Title, Title Search, Title Insurance and Escrow, hopefully clearing up any questions you may have as a home owner, buyer or seller.

What is Title?  The "Title" to your property is a means of legally proving ownership of "real property".  Land and the structures built on it are considered "real property", meaning it cannot be moved or hidden.

What is a Title Search? Real property (land and homes) can change ownership many times over the years.  At any point along the chain of ownership, problems may arise that cast a “cloud” over a title, potentially causing issues regarding ownership.  A Title search reviews the chain of ownership and will hopefully uncover and issues affecting the Title with the intent of resolving those issues before another change in ownership occurs.  Things that can negatively affect Title of a property are: Mortgages in the property, past ownerships that were not correctly dissolved, mechanics liens, failure of past owners to pay property taxes, etc.

What is Title Insurance? Just like other insurance policies we purchase such as homeowners, health or life insurance policies, title insurance protects your claim to your property from potential problems caused by irregularities that may have occurred in the past. It is important to use a Title Company that uses a reputable underwriter to issue their policies.  Your title insurance policy is only as good as the underwriters ability to pay in the event of a claim.  Ask your Title Company who they are using as an underwriter and verify their standing

What is Escrow? An escrow is an arrangement in which an objective third party, called an escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer's and seller's instructions.

What does a Title Company do?  In Colorado, the Title Company performs the title search, issues the title insurance policy, holds the escrow funds and performs the closing of real estate transaction. A Title Company can use a good underwriter so their policies are good but if the Title Company itself is not reputable or properly managed the money they are given in Escrow can be misused as in the example above.

Why is it necessary in Real Estate Transactions?  Traditionally in Colorado the seller pays for a title insurance policy for the buyer and the buyer pays for a title insurance policy for their lender.  In both cases the insurance policy protects the owner of the policy (the buyer in one case, the lender in another) should there be an issue that arises in the future that may affect the ownership of the property.  This is a good faith effort on the seller's part to ensure they are transferring the property with a 'clear' title.  The lender requires the insurance policy to protect their investment (your mortgage) in the property should a question of legal ownership come up.



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