What is Title Insurance? Why Do You Need It?

Buying a new home is one of life’s most gratifying experiences. As you approach the big day of closing, however, all the details can be a little overwhelming. You might easily overlook the single most important step in the entire process — the purchase of Title Insurance on the wonderful new home of yours.

Historic Development of Title Insurance

The need for title insurance arose historically from the fact that traditional methods of conveying real property did not provide adequate safety to the parties involved. Until a century ago, transferring title to real property was handled primarily by conveyancers, who were responsible for all aspects of the transaction. The conveyancer conducted a title search to determine the ownership rights of the seller and any other rights, interests, liens or encumbrances that might exist with respect to the property, and, based on its search, provide a signed abstract (or description) of the status of the title. Although the conveyancer was generally not a lawyer, that individual was recognized as an authority on real estate law. The origin of title insurance is directly traceable to the limited protection that the work of such a conveyancer provided to the purchaser of real property.
In 1868, the celebrated case of Watson v. Muirhead (57 Pa. 161) was filed in Pennsylvania. In that case, Muirhead, a conveyancer, had searched and abstracted a title for Watson, the purchaser of a parcel of real property. In good faith and after consulting an attorney, Muirhead chose to ignore certain recorded judgments and to report the title as good and unencumbered. On the basis of Muirhead’s abstract, Watson went ahead with the purchase, but was subsequently presented with, and require to satisfy, the liens that Muirhead had concluded were not impairments to title. Watson sued Muirhead to recover his losses, but the Pennsylvania Supreme Court ruled that there was negligence on the conveyancer’s part and dismissed the case. Watson, an innocent purchaser who had suffered financial damages because of the encumbrances on his title, had no recourse.
The decision of Watson v. Muirhead demonstrated clearly that the existing conveyancing system could not provide total assurance to purchasers of real property that they would be safe and secure in their ownership. As a result of that decision, the Pennsylvania legislature shortly thereafter passed an act “to provide for the incorporation and regulation of title insurance companies.” The first title company was founded in Philadelphia in 1876.
This new type of insurance (called “title insurance”), addressed the concerns raised in Watson v. Muirhead by providing: (1) responsibility without proof of negligence; (2) financial protection through a reduction of the risk of insolvency; and (3) the assumption of risks beyond those disclosed in the public records (for which the abstractor was not liable).
Since the late 1800s, the title insurance industry has grown to where it now is an essential component in an overwhelming majority of real estate transactions in this country. The services provided by the title insurers may vary somewhat from one area of the country to the other, reflecting the different laws, customs and procedures of the various states and counties throughout the nation. But the essential purpose of these services is the same ‘ to assist all of the parties in real estate transactions by ensuring that the acquisition or transfer of an interest in real estate can be effected with a maximum degree of efficiency, security and safety. Commerce Title is proud to play a leading and innovative role in this industry.

Title Issues

The job of searching the public records to identify existing rights and interests is not an easy task. The title searcher or abstracter reviews the public records to find all aspects of title, which can be seen and recognized. From the title search, the title examiner produces an opinion of title, from which the Company will issue its insurance.
In many areas, the title to a property can be traced back to a royal grant, charter, or the United States government. In many areas, titles are not traced back that far; instead, local custom or title insurance company requirements dictate a shorter search.
There are few titles, if any, that have a perfect history from their source, or root, to the present day. Each transfer of ownership is a “link” in what is referred to as the “chain of title.” As each transaction or link takes place, there is a potential for a problem. Even if the entire chain of title appears to be in order, the chain is still subject to interpretation. When searching a title, what we are trying to determine are the various rights and interests that make up each link in the chain as it has passed from one owner to another.
A “title” is composed of 3 basic elements:

  1. Rights and interests that are disclosed in the public records or by physical inspection of the property, i.e., deeds, mortgages, leases, etc., parties in possession, utility easements, etc.
  2. Rights and interests that are not recorded but exist, i.e., limitations imposed by laws and statutes, etc.
  3. Rights and interests that are hidden, i.e., forgeries, secret marriages and unknown heirs.
    Every title is made up of many different “rights” and “interests” that may be owned by different people. The “owners” of the property own the most valuable of the property’s rights and interests, but other people may also have rights to the property, such as easements for utilities or mortgages, etc.
    Each title can be compared to sticks in a bundle. The rights and interests are represented by the sticks. The “owners” own what we call a “fee simple” title, that is, they have purchased the most vital and valuable sticks including rights of possession, use, occupancy, enjoyment, inheritance, etc. Also, within the bundle are sticks that may be owned by other parties. These are called encumbrances and may consist of easements, mortgages, liens, etc.
    When a person purchases a parcel of real estate, it is not only the physical property itself that he or she acquires, but the sellers rights and interests, “the seller’s title,” in the property. It is essential for the prospective purchaser to know before the transaction takes place, precisely what rights or interests the seller can convey. The purchaser also needs to know who else may have rights or interest in the property, and about any encumbrances against the property that may affect the use or enjoyment of the land. The title search must cover all these rights and interests.

What is a Title?

A title is the evidence, of right, that a person has to the ownership and possession of land. It is possible that someone other than the owner has a legal right to the property. If that right can be established, this person can claim the property outright or make demands on the owner as to its use.

Do I need Title Insurance?

Most definitely! Title insurance is a means of protecting yourself from financial loss in the event that problems develop regarding the rights to ownership of your property. There may be hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

What can make a Title Defective?

Any number of problems that remain undisclosed after even the most meticulous search of public records can make a title defective. These hidden “defects” are dangerous indeed because you may not learn of them for many months or years. Yet they could force you to spend substantial sums on a legal defense, and still result in the loss of your property.

But the lender already requires Title Insurance, won’t that protect me?

Not necessarily. There are two types of Title Insurance. Your lender likely will require that you purchase a Lender’s Policy. This policy only insures that the financial institution has a valid, enforceable lien on the property. Most lenders require this type of insurance, and typically require the borrower to pay for it.
An Owner’s Policy on the other hand is designed to protect you from title defects that existed prior to the issue date of your policy. Title troubles, such as improper estate proceedings or pending legal action, could put your equity at serious risk. If a valid claim is filed, in addition to financial loss up to the face amount of the policy, your owner’s title policy covers the full cost of any legal defense of your title.

How much does Title Insurance cost?

The one-time premium is directly related to the value of your home. Typically, it is less expensive than your annual auto insurance. It is a one-time only expense, paid when you purchase your home. Yet it continues to provide complete coverage for as long as you or your heirs own the property.

When should I look into purchasing Title Insurance?

Call Commerce Title as soon as you and the seller sign the earnest money contract. With a brief summary of the details, our team of title experts will begin a search of the public records and issue a title commitment. Because there are a number of steps we must take to make certain that we know all we can about the title, it is wise to get the ball rolling as soon as possible.

Should I shop around for the best Title Insurance deal?

Some states closely regulate rates. Others permit open competition, often resulting in significant differences between title insurers on rates and coverage. Depending where you live, it pays to investigate your options carefully in order to obtain the most complete coverage.

Can my title company handle the closing?

Yes, Commerce Title will act as a central clearinghouse for the parties involved — collecting necessary documents, insuring adherence to the lender’s title instructions, making arrangements for proper payment and distribution of funds. We are fully prepared to work with you from the beginning of your transaction all the way through to conclusion.

What items are needed at closing?

You will want to have these items complete or in hand when you come to the closing (please confirm with your escrow officer, as practices vary by state):

* Buyer’s copy of purchase agreement
* Cashier’s check(s) to make all payments
* Proof of purchase of insurance for fire, casualty, etc.
* Invoices for any unpaid taxes, utilities or assessments
* Photo identification (passport, driver’s license, or state-issued identification card)

* Seller’s copy of purchase agreement
* Invoices for any unpaid taxes, utilities, assessments, and latest utilities meter readings
* Receipts for last payment of interest on mortgages
* Bill of Sale of personal property covered by the purchase agreement
* Any unrecorded instruments that affect the title
* Proof of satisfaction of any mechanics’ liens, chattel mortgages, judgments, or mortgages that were paid prior to the closing
* Photo identification (passport, driver’s license, or state-issued identification card)

Tips for Smooth Closings

  1. Use full legal names of parties when preparing contract. Include Realtor Agent name(s) on the contract.
  2. Provide Commerce Title with correct legal description. Check seller’s papers, particularly the Deed and Title Policy for correct legal description. If legal description is in ‘metes and bounds’ terminology, please furnish Commerce Title the complete description when contract order is submitted.
  3. If Realtor Agent is aware of any liens or potential title problems, such as: estate, heirship, probate, bankruptcy, divorce, child support, judgments, mechanics lien, etc. Commerce Title needs this information when order is submitted. This will help cure problems in advance of closing. Since Realtor agents personally know their clients, Commerce Title may ask for help in solving some of these problems.
  4. Caution buyer that the Good Faith Estimate provided by the mortgage company at the time of the loan application, represents only an estimate of closing costs.
  5. Commerce Title needs the new mortgage company’s name, loan officer, loan amount, and telephone number. If new loan is transferred to another lender, please notify Commerce Title of change in lenders.
  6. On new loan transactions, ask buyers to have their insurance agent call the lender as soon as possible before closing. The policy must be exactly like the mortgage company requires, or funding and disbursements may be delayed while corrections are made.
  7. Private Mortgage Insurance is required on many different types of loans. The fees have changed significantly over the past several years. Also, lenders requirements vary as to when it is required. Be sure the lender explains PMI charges to your buyer at loan application.
  8. Commerce Title will hold earnest money at your request. After all the parties have signed and dated contract; inform customers that earnest money will be deposited upon receipt by Commerce Title.
  9. Furnished marital status of seller(s) and purchaser(s) (married, single, pending divorce, widow/widower, etc.) when contract is turned in to Commerce Title.
  10. If there is a need for Power of Attorney, please submit it early to Commerce Title for our review as to adequacy of its content. Approval by the lender may be required. The original will be needed for recording.
  11. Please provide Commerce Title with seller’s present mortgage company, loan number, fax, and phone number. Commerce Title will order a payoff statement using this information. Generally, your seller’s payment statement/coupons will contain all the necessary information. If a seller’s loan is an FHA loan, seller will be charged a full month’s interest for the month in which closing occurs.
  12. Commerce Title welcomes title orders placed by telephone or fax. We need the following information:
    * Seller’s name
    * Buyer’s name
    * Legal description
    * Street address
    * Sales price
    * Loan amount
    * Type of Transaction (VA, FHA, Conventional, Assumption, Owner Carry, Cash, etc.)
    * Seller’s present mortgage company name, address, and loan number
    * Listing and Selling Agents
    Please provide us with a copy of the contract, and the earnest money check, if applicable. Commerce Title will fax a confirmation of your order to you as soon as your order is received. If you do not receive a confirmation, please contact us as soon as possible.
  13. If available, a copy of Seller’s Title Policy should be given to Commerce Title when contract and order are submitted. This will streamline title work on present contract, reduce time needed to be ready for closing, and make it eligible for discount.
  14. Arrange for inspections to be completed prior to the closing date to prevent a closing delay. Arrangements as to whether the buyer or seller is to pay for the inspections and/or repairs should be provided for in the contract. All invoices for
  15. The Termite Certificate, required on FHA and VA loans, should be delivered to Commerce Title with an accompanying invoice prior to the closing date. Be sure certification is done on t he proper FHA/VA form, and within the time frame allowed.
  16. When it is necessary to mail closing papers to out of town parties, please inform Commerce Title as soon as possible.
  17. If there is a change of disbursement, regarding holding money for any reason (especially repairs), this should be discussed before closing between agents and parties so that an appropriate escrow agreement can be obtained, and approval received from the lender if necessary.
  18. For any changes in charges, please notify Commerce Title as soon as possible so we can change closing statements and avoid delays during closing.
  19. There are special assessments in some areas of Douglas County. Always inform buyer of the assessments. Check with us if you need information.
  20. A Cashier’s Check made payable to Commerce Title is required for amount due at closing. To permit buyer to obtain a Cashier’s Check prior to closing, Commerce Title will fax closing statements to Realtor Agent showing amount needed. If exact figures are not available, we will estimate the amount as close as possible. Buyer may also use the Good Faith estimate amount and write a personal check for the difference at closing. Wire transferring instructions are also available.
  21. Tax laws require that the closing agent report 1099 information. Therefore, we will need seller’s signatures, seller’s social security number, and seller’s forwarding address.
  22. On earnest money refund situations, Commerce Title will require a written release signed by all parties (seller, buyer) before money will be released to any party. Realtor Agent should also sign the releases.
  23. For your convenience, Commerce Title employs delivery personnel to pickup closing documents in the Lawrence area.