In this opportunity, we’re going to talk about title insurance and the importance of it, and why it is that you actually need one. For those who don’t know what a title insurance is, it’s actually an insurance that protects against liens on the title.
What is a lien? You’re probably wondering. A lien is the right to possess something until the debt is fully paid off. This is the reason why the banks have the right to take the home away from you when you default on your mortgage payments. It basically works like this: For example, you have your nice home. You bought a property and you got a mortgage. The terms of that mortgage can include:
- The duration of that mortgage.
- What the interest rate will be.
- The monthly payments you’re going to make.
- What we call the IOU, which is in essence, your promise to pay.
You’re promising the bank that you’re going to pay them the debt, that money that they loan you so that you can buy your property. The way it works with title insurance is that typically, prior to closing, when you’re about to buy that property, the title agency, they perform a title search. It is sometimes referred to as an abstract. That title search is meant to find any liens that are on that title of the property. They make sure that the title is actually clean, it’s clear from any debt before the closing so that way, there’s no problems whatsoever and that you don’t inherit anyone else’s debt.
Now, if you don’t know what a clean title is, let’s just take a step back and walk you through that. Imagine a house. This house was foreclosed because the owner did not have enough to continue to make payments in terms of taxes. They did not have enough money to continue and make the mortgage payments. At the same time, it owed money to a lot of people. It owed money to contractors, electricians and more.
Title Insurance: What happens when you owe money
It owed money to a lot of people. What happens when you owe money to people, at least in the United States? They’re not happy about it so what they do is that these people, the contractor, the electrician, they go down to court and they place a lien on your property so that way they can hopefully be able to possess that property under their name until you fully pay them off.
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The way the title insurance comes in is that let’s say in the event that the property does get repossessed and resold, the first thing that it’s going to go is to pay the IRS, Uncle Sam will always keep number one. It is always numbered one on the list in terms of getting their money. The IRS never loses. Then, second in line could be anybody. It could be the bank, it could be the contractor, it could be the electrician. The bank almost always requires the title insurance to be purchased either by the seller or by the buyer before they can go ahead and close on the mortgage. The reason why they do that is because they want to secure their spot as the second ones to get paid before any of these people.
Whatever amount is left after paying the bank, it’s going to go to the contractor, it could go to the electrician, and anyone who is in that lien and on that chain. You might probably be wondering, “Okay, that sounds great, but I still don’t think a title insurance is necessary because, ‘Hey, that’s why they’re actually doing the title search.’” By the time you go to the closing, the title is clean, is assumed to be clean. Remember, the banks are asking you to have a title insurance because they know that errors can happen. They know that the liens are usually placed on a property and not on the name.
What happens when you close on a property
Let’s say, for example, your closing happens on a Thursday at 12:00 PM. You signed all the mortgage. Congratulations, you have a new property. Let’s say that one of these contractors got the LEI prior to closing, they didn’t have the time to go to court, and they managed to go to court on that same day that you closed, but they are recording that lien at 4:00 PM. Now, remember, liens are placed on the property, they’re not placed entirely on who owns it. Regardless of who owns it, that debt is not going to go away.
The sellers sort of pass on that debt to you, which means because you just bought that property, you’re going to be whole accountable for the debt, you’re responsible for paying it. The bank knows that that’s why they want to guarantee their spot because regardless, you’re the one with the debt, you’re the one with the mortgage, therefore, they want to make sure that they’re the ones that get paid first.
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The types of Title Insurance
Usually, in closing, the insurance that you see and the closing statement, it’s an insurance to protect the lender. There’s two types of title insurance.
- One, it’s the lender’s policy.
- Second, you have the one for the owner.
The lender’s policy can be paid either by the seller or it could be paid by you. If you’re working with a great title agency, they will typically ask you as the last checkpoint, if you actually want to buy title insurance to protect you. You don’t have to, but if you want to make sure that you’re protected against any lien, then you should get it.
Usually, the range for the owner policy is somewhere between $200 to $500 depending on the size of the deal, depending on where you are, the State. It’s actually a really good deal, paying $200 or $500 for a one-time deal that could protect you against thousands of thousand dollars on a lien.
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