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By Holly Selders for LIFELines

Although most insurance covers you against what might happen in the future, title insurance and owner's title insurance are the only forms of insurance that protect you from things that might have happened in the past.

The land your home is built upon has a long history of use and ownership. The recorded history of land ownership is called a "title" or a "history of the title." Selling a piece of property to someone else is called "transferring title."

When a mortgage company lends money to someone for the purchase of a home, the mortgage company, or escrow agent, orders a "title search." Essentially, someone from the title company searches the records in a county clerks office, a recorders office, or from privately owned "title plants." These records might be kept on index cards or punch cards, or in tract books, which are often big, musty bound books the size of a small coffee table with yellowing pages. Some records are computerized, but converting this data can take years and gobble up tax dollars.

A title search endeavors to ensure that taxes are paid up to date, the seller is the true owner of the home, all previous mortgages have been paid, and the title is clear from judgments and liens. In the event a blemish is found, the item must be disposed of or shown as an "exception to title coverage." Depending on the exception, the mortgage company may request the title company to "insure over" the exception, or accept the exception. (Say that 10 times fast.) The borrower never hears about title exceptions unless its a really heinous problem that can't be fixed easily.

Title insurance is strictly an American institution. The first title insurance advertisement was published in 1876, pushing protection for the purchaser of real estate. Modern mortgage companies require the borrower to purchase a "lenders title insurance policy" to protect the mortgage company in the event the sale of your home is found to be fraudulent or other problems arise. Often the seller pays for the title insurance, depending on local custom. One way to save money is to find out who issued the previous title policy and ask for a reduced or "re-issue" rate.

Lenders title insurance, sometimes called "mortgagees title insurance" or "loan title insurance," doesn't protect the borrower. If a really major claim against a homeowner is found to be meritorious, the homeowner could lose the down payment, the house itself, and still owe the balance of the mortgage. This is where "owner's title insurance" steps in. For a one-time fee, payable at the time of closing, the title company will issue a policy that pays all legal fees if a claim arises, as well as your actual losses up to the face amount of the policy. Owner's title insurance is a relatively cheap method for achieving peace of mind.

A claim could arise, for example, if long-lost heirs appeared, insisting the house belonged to them. A claim could arise if a mistake is made at the recorders office and a recorded lien is missed. Unpaid federal taxes, forged signatures, mentally incompetent sellers, and deeds that contained errors from the past could all result in a claim. A seller might have granted an easement for the neighbors shed and have forgotten to tell anyone. With luck, any problems like these would show up with an accurate survey.

New construction and recently renovated properties can be particularly vulnerable to claims known as "mechanics liens," which are claims filed against the property by contractors, plumbers, electricians, or anyone else who worked on the home. Click here for a list of 21 hidden title defects.

For more general information, link to Chicago Title and click on "Consumer Info." Also, try Investor Title Insurance Company, LandAmerica Financial Group, Inc., or Homeland Title & Escrow.


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