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Learn more about how title insurance works by reviewing the common myths and misconceptions and the corresponding facts. This information is provided by myClosingSPACE.com in conjunction with ALTA.
Myth: Transferring title to real estate is as simple and as inexpensive as transferring title to an automobile.
Facts: There are few interests involved when an automobile title is transferred - usually they are limited to the owner and the lender. Consequently there normally is little to consider when an automobile is sold.
But there may be literally dozens of persons and entities with different interests and rights in, or claims against, a single parcel of real estate. The value of rights in a parcel of real estate often far exceeds the value of the most expensive automobile.
Some may have the right to use property for certain purposes (such as electric companies accessing power lines), while others may claim the right to prohibit specified use. Some may have a right to occupancy and some the right to rental fees for occupancy by others.
Some may have the right to use part of the land for specific purposes (such as driveway for power line construction) and others the right to use the surface of the property, air rights above the surface, and the right to minerals beneath the surface. Still others, some yet unborn, may have rights that will not commence until many years have passed.
Literally scores of claimants and governmental entities have the right to enforce liens, claims, and encumbrances against the property. Their rights may emerge for such diverse reasons as court judgments, unpaid taxes, welfare payments, unpaid claims of those who make improvements on the property, water and sewer assessments, and so forth.
Because the surrounding laws and records are complex, making an evaluation of the scope and validity of any claim or interest in real property requires an experienced professional. The continually evolving body of real estate law ensures that the numerous kinds of rights in property can be described, preserved, transferred, inherited, devised, levied upon, leased, restricted, zoned, taxed, mortgaged, and acquired by eminent domain.
Simplification of land transfer is a commendable goal - one that is endorsed and pursued by members of the America Land Title Association. But as long as society continues recognize so many diverse interests and claims in real estate, transferring title to land will remain far more complicated than transferring title to an automobile.
Myth: Title insurance and other title related charges make up a substantial portion of closing costs that are a major obstacle for buyers of moderately priced homes.
Facts: Title insurance and other title related charges, in fact, make up a modest percentage of total closing costs normally incurred in the purchase of a home.
Loan discount points, realty agent sales commissions, prepaid items, recording fees and taxes, and lender charges make up a much greater percentage of costs paid by the buyer. None of these is any way related to title protection. In some states governmental transfer taxes alone may exceed the total of title related charges.
High interest rates, high down payments, increased construction costs, higher taxes, and rising maintenance and utility costs may be cited as barriers to home ownership, however title related charges are not a serious obstacle. They represent a small portion of the total settlement expense.
Myth: Lender's title insurance protects the home buyer.
Fact: The interests of the lender and the owner in a real estate transaction are substantially different. Therefore, it is a hazardous assumption for the owner to expect protection from the lender's title policy.
The lender's policy is written in the amount of the loan. If there were a total failure of the title, the lender would be covered for the full amount of of it's investment - while the buyer would have no coverage at all.
Owner's title insurance will protect the purchaser if a claim is made against the title. Owner's title insurance will also pay any legal fees incurred in defending the claim. If only lender's title insurance has been issued, the homeowner would not be covered for legal fees and might lose the property should a problem arise.
Myth: Title services aren't necessary when property is resold shortly or refinanced.
Fact: Regardless of the length of the intervening time period, a new title search and examination and a new title policy are needed to fully protect the parties when property is resold or refinanced. The owner-seller may have created or experienced claims, liens, or encumbrances since the original policy. Here are some examples:
- The owner may have placed a second mortgage on the property.
- There may be outstanding mechanic's or materialmen's liens as a result of improvements made to the property.
- The owner may have created rights of way, utility easements, or other encumbrances.
- Eminent domain rights may have been exercised with respect to part of the property, such as the widening of a road.
- Various involuntary liens may have been placed against the property as a result of unpaid taxes or judgments, welfare claims, etc.
- The owner may have been subjected to bankruptcy or divorce proceedings since purchasing the real estate.
- Other persons may have been granted a lease, life tenancy, or other estate in the property by the owner - beyond the owner's initially acquired fee simple interest.
Virtually all public records searched during the initial real estate purchase have to be reexamined to bring title up-to-date for the subsequent sale. The work involved for issuing new title insurance to provide full protection would be comparable to that for the initial purchase of the property.
Myth: Title Insurance losses are low.
Fact: In 2001 and 2002 title insurers paid 465 million dollars and 582 dollars in claims respectively.
However, focusing on losses paid by title insurance companies as a measure of performance is misleading without simultaneously paying attention to their effectiveness in identifying and helping remove title problems before the closing process. And it must be remembered that title insurers incur substantial overhead in dealing with claims and losses.
Despite their emphasis on risk elimination, title insurance companies will continue to experience loss - making it necessary to continue offering coverage that pays valid claims and pays for defending against attacks on title. And even the most expert title searching and examination will never be able to identify all hazards before real estate transactions are completed.
Myth: Title companies favor complicated land records.
Facts: ALTA has sought improvement and simplification of land records for many years. Many land records are complex and often in a chaotic state. Problems presented by the many different locations where records are kept, difficulties encountered in searching the records, and the sheer volume and complicated nature of liens, claims, and encumbrances recognized in real property only bring higher costs to the title industry through the expense of services and claims that must be defended against or satisfied.
The title industry has been involved inn the following activities to simplify land records.
- Support for substituting a tract index in place of the cumbersome and inefficient grantor-grantee indices presently used in many locales.
- The centralization of all land records in a single location; in many areas these records are now in a number of separately located buildings.
- Support for work initiated by the American Bar Association to develop a universal land identifier system for land records.
- Cooperation with the Commission on Uniform State Laws to develop a Uniform Land Transactions Code "to simplify, clarify, and modernize the law governing transactions".
- Cooperation with the American Bar Association in the development of the Uniform Probate Code, which greatly simplifies the transfer of real property in a descendent's estate.
- Support of work within the Real Estate Settlement Practices Act (RESPA) to establish demonstration land parcel recording systems "to facilitate and simplify land transfers and mortgage transactions".
- Cooperation with the Mortgage Industry Standards Maintenance Organization (MISMO) to develop recommended new standards and automation definitions to greatly reduce processing time for home mortgage transactions.
*Copyright ALTA (American Land Title Association)
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