What is Title Insurance?
Purchasing real estate comes with risks. Buyers understand that there are risks associated with the condition of the home. This is why most buyers perform a home inspection. There can also be problems with your ownership or "Title" to the home. Title insurance can be both a tool to discover those problems before closing and insure that no title problems exist when you become an owner.
Title insurance protects a person's ownership interest in real estate. The title policy insures the owner against losses resulting from property interests that arose prior to ownership. For instance, a title policy would insure that no past owners, lenders, or lien holders would assert an ownership claim against the property. Title insurance can insure against other losses, including those arising from:
- Fraud or forgery
- Improper court proceedings
- Recording mistakes
- Missing heirs or owners
- Unpaid liens or judgments
- Incompetence of previous sellers
There are usually two different title policies issued at closing: an Owner's Policy that insures the new owner and a Loan Policy that insures the bank.
Insuring The Past
Unlike most insurance policies, title insurance does not insure against future risks and problems. Rather, it insures against ownership problems that arose prior to the purchase.
Exceptions and Exclusions
Just as traditional insurance will not insure everything (pre-existing conditions or known risks), title insurance will not insure certain pre-identified "exceptions" and "exclusions." The title company will search the property in order to identify any known property interests, such as ownership rights, liens (mortgages, judgments, or other debts that attach to the property), or easements and property restrictions. These interests will be identified prior to closing as "Exceptions to Coverage" and will not be insured.
After searching the property, the title company will issue a Title Insurance Commitment. The Title commitment is a sample of what the final title policy will look like and gives the parties notice of all Exceptions discovered in the search. The buyer likely will not wish to purchase the property unless certain Exceptions are dealt with by the seller prior to closing, such as paying off mortgages, taxes, judgments, or other liens. Paying these prior to closing will result in removing those Exceptions from the final title policy.
After closing, we will issue the Final Policy of Title Insurance. It will look a lot like the title commitment. Some exceptions may be removed if they were paid at closing.
There are usually two title policies issued at closing. The Owner's Policy protects the buyer (the new owner) and the Loan Policy protects the buyer's lender. In Wisconsin, the seller traditionally pays for the Owner's Policy. It may seem odd that the seller pays for the policy if it protects the buyer. However, the seller "warrants" or promises good title and it is the seller's responsibility to insure that promise by giving a title insurance policy at closing. The buyer, on the other hand, pays for the loan policy that protects the buyer's lender.