Why Do I Need Title Insurance?
Feb. 4, 2014
Frederick S. Long, Esq.
Real estate is likely the most expensive purchase you will make in life. Title insurance is a way to protect your financial interests from losses caused by a dispute over the rights to real estate.
A first-time home buyer will likely question the need for title insurance. If you receive a loan to purchase your new property, the simplest answer is that your lender will require title insurance. If you purchase property without a loan – a cash deal – title insurance may not be required, but it is extremely important to understand before moving forward.
First, let’s explore what it means to own title to real estate. With title, you will receive a “bundle of rights” relating to the property. That bundle of rights may include the following:
- Possession – the right to enter onto and occupy the land, to invite others onto the land, and to exclude individuals from entering and occupying the land.
- Use and Control – the right to use the property for any and all lawful purposes. (building, farming, mining, commercial use, etc.)
- Quiet Enjoyment – the right to use the property as you wish, without “disturbance” from others. A disturbance may be in the form of another party claiming rights to the same piece of property.
Before purchasing real estate, it is extremely important to understand how the rights above may have been affected by the dealings of previous owners. Some major areas for concern are mortgages, easements, judgements, municipal liens, land use restrictions, and backed taxes, all of which may be tied to the real estate from previous owners.
Let’s use an easement, for example. An easement is a right to use property belonging to another, for a limited purpose. If a previous owner of the property granted an easement to the gas company for the purpose of building a pipeline, the gas company would have legal rights to your property. The company may enter onto the land, and it may use the land as necessary to construct a pipeline, at any time. This may include entering and exiting your property with their equipment, cutting or trimming trees and bushes, removing anything located in the area for construction, digging, etc. You may be unable to exclude the gas company from entering onto the land for these purposes. So, you may not own title that is “free and clear” of any and all easements or encumbrances.
Using the above example, suppose you intend to construct a pole barn or a swimming pool on your property. If the gas company has rights to build a pipeline on the land, you may be unable to build your barn, or your pool. The gas company’s easement may, therefore, have significant impact on the intended use of your new property.
The example above is one of many potential causes for concern when purchasing property. You should never make such an important purchase before understanding the rights that you may or may not have, as they relate to the use and enjoyment of your property.
Previous mortgages are another scary example of how your property may have been impacted from previous owners. A separate lender may have a mortgage pertaining to the property you are considering for purchase. If you were to purchase the property before that previous mortgage is paid off, you would be the unfortunate recipient of that debt obligation. The reason for this is complex under the law, but it is relatively simple to understand. A mortgage is tied to the property, not to the person. If the borrower fails to pay on a loan, the lender will seek payment by foreclosing on the property, and by selling it to satisfy the remaining debt. If you buy a piece of property that is encumbered by a previous mortgage, you must pay the debt obligation, or the lender may legally foreclose on the property.
So, with the above in mind, most lenders absolutely require the new owners to purchase title insurance, to protect their financial interest in the property, and yours, from a ‘defect in title.’ A defect in title occurs where some other party has an interest in the land, as in the example with the gas company above.
Title insurance has become the most common way for real estate purchasers and lenders to protect their financial interests in the real estate from losses due to defects in title. Any legal interest in real estate must be recorded in the county records to become an enforceable legal right. Before title insurance came into existence, real estate buyers would obtain an “abstract of title” from an attorney. The attorney would search through the county records dating back at least 60 years to determine any potential causes for concern. This is called a ‘title search,’ and it is still performed today before an insurance company will agree to insure the property. After a title search is performed, the insurance is issued to the purchaser. In the event of a future disturbance, the title insurance will protect your interest in the property. In other words, the title insurance company will pay for any losses caused by a potential defect in title.
Our attorneys have extensive experience handling real estate transactions. We understand that while Title Insurance may seem like yet another fee you’re required to pay, it really does protect you in the event that an individual or business claims an interest to your land in the future.