If you have bought or sold a home before, the words “title insurance” might ring a bell of familiarity. If not, your first escrow transaction might be a little confusing. What is “clearing title?” What is a preliminary title report? Even home buyers and sellers who have been through the process before might not be completely sure. Let’s take a look at what title insurance is, and what it means for you and your home.
What Does Title Insurance Include?
The title on your home functions a lot like the title on your car. It keeps a record of all past ownership along with any financial “damages” (called liens or levies). Just like your car’s title, it must be transferred to the new owner when it is sold. The title on your car is fairly simple, but the title for your home is much more complicated.
Your home title includes all past ownership, down to who bought the land in the first place. Title records include records of liens & levies; these are financial or legal claims against your property for the satisfaction of a debt (collateral), and the legal seizure of your property for the satisfaction of a debt, respectively. Finally, title insurance includes a legal description, any assessments, boundary encroachments, or easements. These establish the boundaries of the property.
Why Do I Need Title Insurance?
When you sell your home, one of the first steps before putting it on the market is to order title insurance. This is required by the escrow company, because it ensures that the title on your home is not damaged, you have the right to sell the home, and there are no outstanding levies, liens or boundary disputes. The lender needs title insurance as well, because it assures that they are making a safe investment when issuing a mortgage on the property.
The Transaction Process
When you order title insurance, the first thing you will receive from escrow is a preliminary title report. This report includes general parcel information, ownership information, a parcel map, and a legal description. It also states any exceptions to the title insurance. These could be the easements, liens, and other elements mentioned above. Some of these exceptions will stay with the property (like a lien from the utility company, or an older easement), and others will need to be cleared before the title is insurable/marketable.
So what is “clearing title?” Clearing title is exactly what was just mentioned – resolving any exceptions to the title insurance. This process is long and complicated, it happens throughout the home buying/selling transaction. Escrow works hard to track down old files and documents that clear or justify these exceptions. Each time that escrow resolves an exception, either by finding a file in public records, getting the seller to pay off a loan, or any number of other processes, you will receive a supplemental report. This report outlines a change in the title of your home.
Toward the end of your transaction, escrow will finally clear the title. When this happens, they will issue a title insurance policy. This states that the title of the home is clean – that the owner had the sole right to sell the home and they didn’t leave behind any outstanding claims on the property or it’s boundaries when they passed ownership to the buyer.
End of Transaction
So who pays for everything? The fee for all of the title and escrow company’s hard work is split between you and the buyer at closing (unless otherwise arranged). The buyer pays for the lender’s title insurance at closing, which protects the lender against legal action if the buyer runs into an issue with the property. You will pay for your own title insurance policy, which has the same purpose. Should the buyer find an issue with the property and decide to pursue legal action against you, title insurance will protect you.
Title insurance sounds complicated, but this explanation only scratches the surface. Our title and escrow companies do more work than we could ever give them credit for, which is why we thank them tirelessly. If you have further questions about your title insurance policy or title insurance in general, ask us a question or reach out to your title and escrow company. They are always happy to answer your questions. You can also check out the resources listed below from one of our favorite title and escrow companies: Chicago Title and Escrow.