Title Insurance: What Buyers Should Know About Title Issues
When buying a home, most people focus on the property’s condition, location and purchase price. However, there’s another important consideration that isn’t always visible during a showing: the property’s title.
Title issues can involve old mortgages, unpaid liens, recording errors or even questions about who legally owns the property. Although many problems are discovered and resolved before closing, others may not surface until years later.
That’s where title insurance becomes important. It can help protect a homeowner from financial losses involving certain ownership problems that existed before the property was purchased.
What Is a Property Title?
A property’s title refers to the legal rights associated with ownership. When you purchase real estate, you want to be confident that the seller has the right to transfer those ownership rights to you.
Before closing, a title examination reviews public records to identify potential problems. This typically involves reviewing deeds, mortgages, liens and other recorded documents.
The goal is to identify issues that could interfere with the transfer of ownership or create problems in the future.
Common Title Issues That Can Affect a Home Sale
Even properties that have changed hands several times can have title problems. Some are relatively simple to correct, while others require additional research or legal work.
Common examples include:
- Unreleased mortgages: A previous mortgage was paid off, but the discharge was never properly recorded.
- Outstanding liens: Unpaid taxes, judgments or other debts may create claims against the property.
- Recording errors: A deed or other legal document may contain incorrect information.
- Ownership questions: Missing heirs or improperly handled estates can create uncertainty about ownership rights.
- Forgery or fraud: A document in the property’s ownership history may have been improperly executed.
- Easements or restrictions: Certain recorded rights or limitations may affect how the property can be used.
Not every title issue prevents a sale. However, the closing attorney and title insurance company must determine how to address any problems that are discovered.
What Is a Letter of Indemnity From a Title Insurance Company?
One situation that can arise during a title examination involves an old mortgage that appears to remain outstanding.
For example, imagine a homeowner purchased a property 15 years ago. The previous owner’s mortgage was paid off at that closing, but the discharge was never properly recorded at the Registry of Deeds.
Now the current owner wants to sell.
During the new title examination, the closing attorney discovers that the old mortgage still appears in the public records. Even though the loan may have been paid, the missing discharge creates a title issue.
This is where a letter of indemnity may help.
A letter of indemnity, sometimes called a hold harmless letter, is an agreement between title insurance companies. Generally, the company that insured the earlier transaction agrees to protect the new title insurer against certain losses involving a specific title defect.
In other words, the previous insurer may agree to assume responsibility for a covered issue so the new insurer can proceed with appropriate protection.
A letter of indemnity does not necessarily remove the defect from the public records. Instead, it can provide an insurance-based solution that allows a transaction to move forward.
Whether this approach is acceptable depends on the title issue, the insurance companies involved and their underwriting requirements.
Why Is a Letter of Indemnity Important?
Without an acceptable solution, an unresolved title problem could delay a closing.
A letter of indemnity may allow the transaction to proceed without waiting for a missing document to be located or recorded. However, not every title issue qualifies for this arrangement.
There are several important considerations:
- The earlier title insurance policy must provide a suitable basis for the request.
- The prior insurance company must agree to provide indemnification.
- The new title insurer must accept the arrangement.
- Some defects must still be corrected before closing.
This is one reason having an owner’s title insurance policy can become valuable years after the original purchase.
Owner’s Title Insurance vs. Lender’s Title Insurance
Many buyers assume they already have title insurance because their mortgage lender requires it.
However, there are two different types of policies.
Lender’s Title Insurance
A lender’s policy protects the mortgage lender’s financial interest in the property. Most lenders require this coverage when issuing a mortgage.
The important distinction is that a lender’s policy does not protect the homeowner’s equity.
Owner’s Title Insurance
An owner’s policy protects the buyer’s ownership interest against covered title defects. It can also provide legal defense and financial protection if a covered claim arises.
Unlike a lender’s policy, owner’s coverage generally remains in effect while the insured homeowner maintains an ownership interest in the property, subject to the policy terms.
In Massachusetts, owner’s title insurance is generally optional. However, it is worth considering because the lender’s coverage is not a substitute for protecting your own investment.
Why Buy Title Insurance If a Title Search Was Already Completed?
This is a reasonable question.
If a closing attorney has already examined the property’s title, why would additional insurance be necessary?
The answer is that even a careful title examination cannot eliminate every possible risk.
Some problems may not be apparent in the available public records. Others could involve forged documents, previously unknown heirs or mistakes that aren’t discovered until years later.
A title search helps identify existing problems before closing. Title insurance provides protection against certain covered problems that may still arise afterward.
These are two different but complementary forms of protection.
How Much Does Title Insurance Cost?
Unlike homeowners insurance, which typically involves recurring premiums, title insurance is generally purchased with a one-time premium at closing.
The cost depends on factors such as the purchase price, policy type and insurance provider.
For many buyers, the expense is relatively small compared with the overall investment in a home.
It’s also important to understand what the policy covers. Title insurance policies contain exclusions, exceptions and limitations, so buyers should review the coverage with their closing attorney.
Can Title Issues Affect You When You Sell Your Home?
Absolutely.
A title problem may remain unnoticed for years until a homeowner decides to sell or refinance.
At that point, a new title examination may uncover an issue involving a previous transaction.
For example, the closing attorney might discover:
- An old mortgage without a recorded discharge
- A judgment or lien that was never released
- An error in a previous deed
- A missing document in the ownership history
Resolving these issues can take time. Depending on the circumstances, the homeowner’s existing title insurance company may be able to assist.
That’s why it’s a good idea to keep a copy of your owner’s title insurance policy with your important property documents.
Protecting Your Investment
For most people, buying a home is one of their largest financial decisions. While inspections help buyers understand the physical condition of a property, title insurance addresses a different type of risk.
You may never need to make a claim. In fact, most homeowners will never experience a serious title dispute.
However, if an ownership problem does arise, the financial consequences can be significant.
Understanding how title insurance works, why title issues occur and how a letter of indemnity may help resolve certain problems can make the buying and selling process less confusing.
Buying or Selling a Home in Massachusetts?
Whether you’re purchasing your first home or preparing to sell a property you’ve owned for decades, understanding the closing process is important.
Tibbetts Real Estate Group helps buyers and sellers navigate real estate transactions throughout Andover, North Andover, Haverhill and surrounding Massachusetts communities.
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Title insurance coverage and indemnity arrangements depend on the specific policy and circumstances. Your Massachusetts closing attorney can explain the legal requirements and available options for your transaction.
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