Why Do I Need Title Insurance?
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UNDERSTANDING TITLE INSURANCE
Title Insurance Defined
First of all, let’s define what Title Insurance is. Title Insurance guarantees the transfer of the purchased property free of any encumbrances/liens. Some of these encumbrances are mechanic’s liens, mortgages, delinquent property taxes, home equity lines of credit and court judgments (ie. child support). Title Insurance warranties that the property has “clear” title. This assures the buyer that he is not taking on any unknown financial obligations when purchasing the property.
Who Pays for Title Insurance
Typically, it is the burden of the seller to pay for the Title Insurance. It is a guarantee from the seller that they are the rightful owner of the property and selling it “free and clear” of any encumbrances. Because all encumbrances may not be recorded as of the date of sale, the insurance provides peace of mind that there will be no surprises for the buyer after taking ownership of the property.
How Does Title Affect Escrow
When escrow is opened, the contract default is that the buyer has 17 days to do their “due diligence”. This is their time to research anything and everything about the property. One of these contingencies is the right to review the title on the property which is found in the “Preliminary Title Report”. The title company generates this report. Escrow then distributes it to the respective parties. If the buyer is planning to get a loan, the lender will require a commitment from the Title Company to insure the title on the property.
The report shows anything recorded against the property. This includes any easements, property taxes, and of course any mortgages. Any judgments or liens recorded against the property must be satisfied (or paid off) prior to the transfer of ownership. Oftentimes, these can be paid through the proceeds of the sale.
The buyer will have to sign a receipt in escrow acknowledging that they have reviewed and approved the Preliminary Title Report.
In summary, Title Insurance is a protection to the buyer and the seller. One should expect to see it in any real estate transaction . It protects the seller in that it places the burden on the Title Insurance company should any issue arise after escrow closes. It protects the buyer in giving assurance that they are covered in the unlikely event of some yet unrecorded lien showing up after close.
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