Buying a home involves a significant investment of time and money. The settlement process involves complex documents and numerous details. One aspect that buyers and sellers often ask about is title insurance. They frequently wonder if it is really a necessary cost. The answer is simple: Title insurance is absolutely essential when you buy real property. Here’s why that’s the case.
The seller of property must establish ownership of the real estate, which requires proving that the seller has title to the property. Evidence of title is contained in complex historical records, maintained in the jurisdiction where the property is located.
Proving title requires examining all the records relating to the specific parcel of property. The records include deeds, mortgage documents, liens, judgments and other court records, encumbrances, and other documents. A title search includes an examination of all those records relating to the property in question.
A title search sometimes reveals defects in the title. These deficiencies are also called clouds on the title. A defect could be an unsatisfied judgment or lien, unpaid taxes, judgment against the seller, filing errors, or other issues that result in the seller being unable to convey clear title to the property. In most cases, a defect can be cured. But sometimes a court action is necessary to resolve a cloud on title to property.
When you buy property, part of the settlement process includes a title examination to ensure that you receive clear title to the property. But what if an undiscovered defect in the title appears out of nowhere after you purchase the property? That’s where title insurance becomes extremely important.
Unlike most insurance, such as car and home insurance, title insurance does not protect you against future occurrences. It protects you against past events (defects in the title to the property) that were undiscovered at the time you purchased the property.
If you discover a defect in your title after you complete the purchase, the defect could mean that you lose your home or property, or at least spend a lot of money clearing the defect from the title. But if you have title insurance, the insurance pays the necessary costs of clearing your title.
Typically, there are two title insurance policies. The first is an owner’s title insurance policy, which protects you as the purchaser of the property. The cost is based on the purchase price of the property. In Michigan, the seller usually pays for the owner’s title insurance policy.
If you borrow money to purchase your home, you also have a lender’s title insurance policy in the amount of your mortgage. This policy protects your mortgage company against future discovery of defects in the title, which could jeopardize the company’s ability to recoup the loan. The buyer usually purchases the lender’s policy.
While Michigan does not require buyers to purchase title insurance, your lender probably will require it if you take out a mortgage to make the purchase. For your own protection and peace of mind, an owner’s policy makes a lot of sense too.
Title insurance is a one-time cost, paid when property is transferred. You do not pay annually or periodically. The policy lasts for as long as you own the property.
In most cases when you purchase property, an attorney or closing agent handles the settlement and property transfer. Your attorney or agent arranges for a title search and title insurance through a title company. You do not need to shop around for the insurance or do anything other than understand the process and the insurance.
If you buy property in a For Sale By Owner (FSBO) or private transaction where a real estate agent is assisting you, title insurance is one of the important reasons why you should have an attorney represent you in the transaction. Additional information about FSBO transactions is available in our blog post, Buying or Selling Your Home Without a Real Estate Agent — FSBO Sales and Purchases.
From my Ann Arbor law office, I assist buyers and sellers with all aspects of real estate law. As part of representing buyers in real estate purchases, I assist in obtaining title insurance, as well as ensuring completion of the title examination and resolution of any defects discovered in title to the property. My goal always is to protect my clients’ rights and interests, regardless of whether they are a buyer or seller in a real estate transaction.
I offer a broad range of real estate services at competitive prices to clients in Ann Arbor and throughout Washtenaw County. To talk with me about any real estate law matter, call (734) 649-0784, send an email to firstname.lastname@example.org, or use the online contact form.