Do I need a title to own a house?
One concept I frequently find myself explaining to buyers is the property’s title. It’s a confusing concept, often referred to as a “bundle of rights” granted for a specific piece of property. So, to clear the air, here’s the skinny on title, title companies, and title insurance!
WHAT DO YOU MEAN MY HOME HAS A TITLE?
No, your home isn’t a duke or a duchess, but, like the landed gentry, it does have a title. Confusingly, the title is not a physical document, but a concept used to describe several rights — including the rights to occupy, lease, enclose, or grant to another. Holding title in a property means that you own all the legal rights to the property, and it is conveyed by the deed. The deed is a legal document which legally transfers the title from one owner to another.
SO WHAT DOES A TITLE COMPANY DO?
In general, a title company has four major responsibilities during the sale of a home:
To research the history of the property’s title and ensure the seller has the right to transfer the title to the buyer. This is really important — you need to make sure that at the end of the transaction you actually own the property you thought you were buying! A title search is also required by your lender.
To hold the buyer’s Earnest Money Deposit in escrow until the transaction is complete. The title company serves as the neutral third party in the sale, protecting the rights of the buyer and the seller while due diligence is performed on the property. It protects the buyers from losing money on a bad deal if it falls through.
To conduct the settlement or “closing” where the title is legally transferred and closing payments and agreements are finalized. Typically, you actually sign the final paperwork in the presence of a title attorney. Of note, a settlement/closing can either be joint—buyers and sellers are present at the same time—or split—buyers and sellers sign the final paperwork at separate times/locations.
To record the deed and any other documents legally required by the transaction with the appropriate government office. Without a recorded deed, it will be hard to prove that you actually own the property!
WHAT IS TITLE INSURANCE, AND WHY DO I NEED IT?
Like with any big investment, insurance protects you from unforeseen circumstances and shady deals that the title company’s due diligence was unable to uncover prior to the sale. For example, if a seller failed to pay past property taxes and the title company missed it prior to the sale, title insurance would cover your expenses. Unlike other types of insurance that protect you from future trouble, title insurance protects you from unknown events in the property’s past.
Title insurance is paid for in a single premium at closing, and while it is common for both the buyer and the lender to have title insurance, only the lender’s title insurance is required. The lender’s title insurance premium is paid by the buyer, and covers the lender’s potential court costs, expenses, and equity in the event a claim is made against the title. Similarly, the owner’s title insurance protects the buyer’s investment, including legal expenses or even the full purchase price of the house.
Typically, title companies offer two types of owner’s insurance: standard and enhanced. Which policy makes sense for you depends on the types of coverage offered and the history of the property itself. A good title company and attorney will discuss these options with you so you can make an informed decision.
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You know the drill. If you have questions, concerns, or comments, don’t hesitate to contact me or leave a note below!
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