Title and Title Insurance

TLDR: Title is the concept of ownership rights whereas a deed is the physical document that demonstrates ownership. A title search is a review of the previous owners to ensure you’ll receive a clear title after the purchase.

Imagine This: You’ve just closed on a property and you think the property is rightfully yours. However, someone shows up on your doorstep claiming that the property is legally theirs. It turns out that 40 years ago, the owner of the property you just purchased passed away and no heirs could be located. As a result, the government auctioned the property off to a new buyer, who then eventually sold it to you. Turns out that the deceased owner 40 years ago had surviving kin after all.

Now what?

While this scenario is highly unlikely, title insurance will reimburse you and the lender in the event that something of this nature arises. 

What is a title, deed, and title search?

The subject of title can get confusing so let’s introduce some of the language. 

The Title

The title of a property has to do with ownership rights and is a concept, not a physical artifact. 

The Deed

The deed, on the other hand, is a physical document that exhibits and transfers ownership.

A Title Search

A title search is, as the name implies, a search through historical land records for ownership (title) claims to ensure the property will be truly yours after closing. Before you close, the title company will look through the chain of title in your local land records department to ensure there were no mishaps with transferring the property throughout the years.

Chain of Title

Your local municipality's land records department maintains the track record of ownership called the chain of title. The chain of title doesn't only list past property owners. It also lists other forms of ownership, including mortgages, liens, and judgements. A search into the chain of title ensures current owners and ownership claimants are appropriately compensated before transferring ownership. The new lender will want to ensure its collateral is unencumbered by other ownership claims before you buy it. 

Clear Title

Having a clear title is referring to a property that is free of any outstanding claims to the property. A property that is encumbered by other claims to ownership is said to have clouds on the title. 

Fun Fact

A lien on a property is simply a claim to a property for an outstanding debt. When a court awards a judgement to a creditor for money owed, that creditor may place a lien on a property, which must be paid before the property can be sold. A title company ensures payment is remitted to any creditors and the buyer receives a clear title.

Example of a Lien

When you purchase a house and obtain a loan, your lender will file the mortgage with the land records department to ensure that if you decide to sell the house, the new owner won't buy it until you've paid off the debt to the lender. It is essentially a claim to the property until your debt is paid in full. 

What is a title company and what do they do?

A title company, often referred to as a settlement company, is eponymously named for the type of work it performs: conducting the title work and coordinating settlement. These are two different camps of work and each involve a significant amount of effort, so let’s review what they entail.

Title work involves...

Settlement includes...

You can read more about title work in Buyer Step 3: Obtain Title and Title Insurance.

What is title insurance?

Title insurance pays you and the lender in the event that someone unexpectedly claims rightful ownership of the property. Such a scenario would leave both you and the lender SOL–you’d have no claim to the property and everything you had paid toward the mortgage and that the lender paid to the previous seller would be lost. If you select the title insurance that covers both you and your lender, you would both be reimbursed via your title insurance.

Fun Fact

Most lenders require that the buyer purchase title insurance on the lender's behalf.