In the U.S., the land registration system doesn’t guarantee full ownership of a title regardless of purchase. Title insurance is a way of protecting both mortgage lenders and property buyers against problems with a title any time property ownership is transferred. The title insurance company might be held responsible for paying any damages arising from a dispute, depending on the policy that it offers. If an individual chooses to purchase a home, there might be outstanding factors that could threaten their holding of the title. In this case, they might consider purchasing title insurance.
Public archives hold records of any time a property is sold, bought or financed, as well as other public notices like levies or liens. The purpose of title insurance company is to essentially go through public records to see what the real status of ownership is on a property. Does it have outstanding debt that could potentially be transferred to the new owner? While insurance typically covers future events, the purpose of a title insurer is to guarantee that past events leading to current ownership are true, thereby ensuring when a buyer purchases a property, the property has no other interest holders.
When this search is complete, the underwriter’s job is to determine whether the title is insurable. Sometimes there are unavoidable problems that are outside the control of the title company like forgeries, or heirs that were previously undisclosed. The title also has to be clean of any complications including fraud, clerical errors, pending legal actions, any unpaid taxes and other complications. An underwriting company will then issue an insurance policy to pay in case there’s a need for defense in case of someone trying to change the title. The homeowner will be compensated for their equity if they end up losing the title.
It can be advantageous for property buyers to select agencies recommended by their lenders, and not the sellers. Almost every lender will require that the property owner purchase title insurance. This will ensure that the lender will be protected in case something goes wrong with transferring the title.
Property purchasers don’t usually make their own choice as to what company they trust to provide title insurance. Usually their bank or lawyer makes the decision. This is done because the lender is sometimes a good source of finding a good title insurance company; their interests are similar to the property purchaser’s. They want to make sure that the property will remain in the hands of the owner so there’s less chance of a default. Frequently, policies are required for both lenders and policy owners to ensure that everyone is appropriately protected. Once the title is deemed insurable, the property owner only has to pay for the policy once and then the coverage will be theirs for as long as they own the property.
In 2007, the United States Government Accountability Office recommended that consumers have the ability to improve price competition, as well as the ability to choose their providers based on price. Even though the decision of what company to work with is usually made by the bank or an attorney, the property owner has the right to choose for themselves, and in fact, it’s actually illegal for any bank, attorney, or real estate agent to require that a client use a particular company, according to the Real Estate Settlement Procedures Act, or RESPA.
Reasons for the Existence of Title Insurance
There are two globally use systems for titles: the first is land registration and the second is land recording.
With land registration, the government will determine title ownership. If the government makes a mistake, the person damaged will be likely to receive a form of monetary remuneration, but in most cases won’t be able to get the property back.
With the land recording system, a transfer or any land related transaction will be recorded with the local government in the county that transaction takes place. The document is photographed so that It’s available for public record, because if it remains undocumented, an unprincipled seller could potentially sell the property to another buyer. A lot of states have a policy where the first person to receive the title is the legal owner.
Advantages of the recording system are the following:
– The costs associated with running a recording system will come out of the pocket of the parties who use it, whereas land registration is publicly funded.
– Independent entities are responsible for reviewing land transfers put in place by the government with a recording system. With land registration, the government can decide to change the outcome of disputes into its favor and preventing the use the rightful separation of constitutional right and power.
– Land recording can be helpful in situations that can’t be solved through public records, like the conveyance of inheritance or homesteading.
– A recording system is useful when used in tandem with title insurance in case of a natural disaster. If town records are destroyed, out of town companies will have records of property ownership in case owner need to prove their ownership.
The process an underwriter has to take to sort out if there are any complications with a title of ownership is the following:
– They must first get records of ownership pertaining to that property from the offices of recorders and go through the indexes, making sure to keep in mind law established by state courts.
– They have to scrutinize these records very carefully.
– Decide If and how the property title is affected under the law. In general, the state court will make the final decision as to ownership.
Historically, almost 20 American states have tried experimenting with other forms of title recording, but none have lasted due to title insurance agencies applying pressure on legislature or disinterest.