The ABCs of Title Insurance

Title

The title is the legal right to own, sell, or use a piece of real property. When an individual purchases a home, the title transfers from the previous owner to the new owner. Title is a status, and it is granted through a deed.

When a home or property owner is vested in title, they have certain rights attached to that property. These rights include the rights of possession, control, exclusion, enjoyment, and disposition. Your title can be insured through title insurance to protect against any potential threat to your ownership.

Deed

A deed is a written document that transfers title to a home or piece of property from one individual to another. The deed includes:

• Identification of the seller (the grantor) and the buyer (the grantee)
• The purchase price of the home or land
• A legal description of the property
• The loan amount
• The notarized signature of the grantor

The deed is signed at closing and it must be recorded with the county courthouse after the closing is complete. To truly own a home or piece of property, you have to be in ownership of the most recently recorded deed. If you’ve ever sold a home, you may still have the deed to that home in your files. But because you sold the title when you sold that home, your deed is no longer valid.

Abstract

The abstract of title is a document that provides the legal history and chain of title for a given property. This history will often extend to the earliest public record for the property. Similar to a timeline, the abstract includes information such as:

• The legal description of the property
• Who has owned the property over time and how that ownership (or title) has been transferred
• Liens and encumbrances attached to the property
• Other legal documents associated with the property

A title abstract contains data from the public record that has not been interpreted and can’t guarantee a title on its own. Instead, an abstract is used by an attorney or title company to make determinations about the status of the title prior to the sale of a home or property and to generate a title commitment.

Title Commitment

A title commitment is a document that is issued by the title company and is a promise to provide title insurance for a property after closing. The title commitment includes information about the current ownership and property status, requirements that must be fulfilled before issuing title insurance, and exceptions to title insurance coverage.

Defects

A title defect is any threat to someone’s right to own a property free and clear. These defects, also known as a cloud on the title, can be revealed during a title search and can include:

• Missing deeds
• Defective deeds
• Encumbrances
• Liens

If defects are found during the title search, these defects must be cured before transferring the title or issuing title insurance.

While a title search will uncover most defects affecting a property, not all defects can be reasonably found. Defects such as honest errors in the public records, missing heirs, forgery or fraud, or undiscovered liens are considered hidden risks to a title. Title insurance protects against these hidden risks.

Encumbrance

An encumbrance is a type of title defect and is a claim to a piece of property made by someone other than the property owner. Liens are one type of encumbrance. Other encumbrances include deed restrictions, easements, and encroachments. Encumbrances usually limit the owner’s use of the property in some way.

Not every encumbrance creates a cloud on the title. For example, nearly every home has easements that permit utility companies to access the property. These encumbrances will be listed as exceptions in Section B-II of the title commitment.

Lien

A lien is a legal claim against a property in which the lien holder has the legal right to sell that property in order to reclaim debts. Liens are debts that attach to a property rather than to a person, so all liens must be cleared to present a clear title when a home or property is sold. Liens can be voluntary or involuntary.

A mortgage is a voluntary lien. When an individual takes out a mortgage on a home, they agree to pay back the full amount of the loan with interest through an agreed-upon schedule of payments. If the homeowner fails to repay the loan, the mortgage lender has the legal right to seize the property and sell it to pay off the loan.

Involuntary liens are liens that are placed on a property against the wishes of the homeowner. These are usually placed by agencies looking to reclaim unpaid debts. Failure to pay state or federal taxes can result in a tax lien. Other involuntary liens include mechanics liens, judgment liens, and HOA liens.

Easement

An easement is a type of encumbrance that allows someone other than the property owner to use a piece of property. Easements will be disclosed in a property survey, and these are excluded from title insurance coverage. Easements should also be included in the legal description of the property on the deed.

There are several different types of easements. Most people are familiar with utility easements. Other easements can specify permissions for an individual to access the property, such as to use a road or driveway that runs through the homeowner’s land.

Encroachment

An encroachment is a type of encumbrance that occurs when an individual (usually a neighbor) violates the property rights of another homeowner. Encroachments are often accidental and are usually listed as exceptions to title insurance coverage.

Fences are common encroachments. If a fence is built without consulting a property survey, it may accidentally encroach onto the neighbor’s property. This fence can be a liability for a future homeowner. Other encroachments include overgrown foliage or structures that cross property lines. Encroachments should be disclosed on a survey of the land.

Why you need to know your title ABCs

Being a good realtor involves so much more than being able to list and sell a property. To properly serve your clients, you need to have a deep understanding of every aspect of the real estate transaction. If there’s ever something you’re confused about or not sure if you understand, don’t be afraid to ask questions.

At South Oak, we partner with realtors to provide education and professional development so that you can deliver top-notch service to your clients. We’re always happy to any questions you have about title insurance or any other aspect of the closing process. Contact us any time with questions.