What do title companies do?
One of the best ways to think about ownership of real estate is that it consists of a “bundle of rights.” What this mean is there are many aspects to private ownership that need to be understood in the context of purchasing your home.
First, your land has been transferred many times. Each transfer presents an opportunity to separate out some portion of these bundle of rights. Prior owners may have granted interests to utility companies to allow then to bring power and water to the property. This is called an “easement.” An owner may have sold off subsurface mineral rights. This means a third party has the right to look for oil or other minerals beneath the property you want to buy. In addition to private interests in real estate, there are public interests, such as the ability of a city or county to levy real estate taxes, or a Home Owner’s Association to charge assessments.
There are many other ways in which property rights can be fractured that will impact future ownership. Title companies will research the history of your property to determine what the status is of any interest granted since the time when ownership first passed from either the Federal or State government. Then, when you contract for purchase, the title company will produce a “Title Commitment,” a document that explains what must happen for the seller to grant you all available rights (the “requirements”) and what interests they are not insuring (the “exceptions”). They commit to insure these rights with a policy of title insurance once the requirements are met. This allows for both the smooth transition of ownership and the ease of financing, because the lender learns exactly what rights they are providing financing to purchase.
How am I protected?
Once your purchase is complete, a policy of title insurance provides you with protection against any undisclosed interests, such as forgery of documents, conveyances by minors, undisclosed heirs or mineral claimants and many other issues. Because even the most careful research of public records of real estate may not disclose all interests or defects, your policy ensures that even unknown issues will not impact your ability to fully enjoy your rights of ownership. You will be protected for as long as you own your property by the one time payment of premium (which in many states is paid by the seller on behalf of the buyer).
In addition, if your property is mortgaged, a second policy (the Lender’s Policy) protects your lender from the same issue. This lender’s protection means that they are making a safe investment in your purchase which reduces their risk and consequently the interest they must charge to make your loan. This lender’s policy is the portion of insuring cost generally born by the purchaser.
What are the costs I will pay?
As described above, the cost of an owner’s title policy in most states is customarily born by the seller to show the buyer that the seller has the right to convey the property. This is generally the larger cost of the total paid at closing for title insurance. The lesser portion is the Lender’s Policy, which is paid by the borrower. These are the only premiums paid and unlike other forms of insurance will cover the buyer and lender for as long as the buyer owns the property, be it one or one hundred years!
The title company may provide closing services, acting as a “disinterested third party” in the transaction. This allows the seller to complete the deed to the buyer before being paid and allows the buyer and lender to move their funds before the deed is handed over and recorded in the public records.