What is Title Insurance? Protection Against Title Defects

Buying and selling a home involves a significant investment of time and money as well as 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. Here’s why that’s the case…

Establishing Title to Real Estate

In a real estate transaction, a seller must establish their ownership of the property which requires proving that they have title to the property. Evidence of title is contained in the historical records at the county Register of Deed’s office. However, proving a person has good title to a property requires examining the prior recorded records relating to the property. The records include deeds, mortgage documents, liens, judgments, restrictive covenants, deed restrictions and other encumbrances that affect what a property owner may do with it. A title search includes an examination of all those records relating to the property.

A title search can also reveal a defect in the title which are called clouds on the title. A defect could be an unsatisfied judgment, lien, legal description error, or other issues that result in the seller being unable to convey clear title to the property. Although in most cases these issues can be resolved, sometimes a court action is necessary to resolve a cloud on title to 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 important.

What Is Title Insurance?

Unlike most insurance, such as car and home insurance, title insurance does not protect you against future occurrences. It protects you against defects and encumbrances in the title to the property that were undiscovered at the time you purchased the property. Title insurance is a one-time cost, paid when property is conveyed to you. You do not pay annually or periodically. The policy also lasts for as long as you own the property.

If you discover a defect in your title after you complete the purchase, the defect could cause you time and expense, including a court action, to clear the defect from the title. However, if you have title insurance, the insurance pays the necessary costs of clearing your title.

Typically, there are two title insurance policies in a property transaction. The first is an owner’s title insurance policy, which protects you as the purchaser of the property. The cost of the policy 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 property, your lender will want a title policy in the lender’s name for the amount of the mortgage to protect 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 will require their own policy if you take out a mortgage to make the purchase. For your own protection and peace of mind, an owner’s policy is a must.

How Do You Get Title Insurance?

In most cases when you purchase property, an attorney or real estate agent handles the process of contacting a title agency for a title search and an owner’s policy of title insurance.

If you are purchasing or selling property in a For Sale By Owner (FSBO) transaction, or if you are using a real estate agent, title insurance is one of the important reasons why you should have an attorney represent you in the transaction. See Buying or Selling Your Home Without a Real Estate Agent — FSBO Sales and Purchases for additional information about FSBO transactions.

Talk With an Experienced Real Estate Lawyer

In his law practice at Ager Law Office, Bill Ager assists clients with purchasing and selling real estate from start to finish, including obtaining title insurance coverage and reviewing the title policy and all documents that impact property ownership.

To talk with Bill about his reasonable flat fees, call (734) 649-0784, send an email to bill@agerlawoffice.com or use the online contact form from his web site.