In almost every real estate purchase, the buyer will see a charge on the settlement statement for an item called "title insurance." In many cases, the buyer will question what the charge is for and why it is necessary. This article will explain what title insurance is and why it is necessary.
Title insurance is a form of insurance in which an insurance company, called a title insurance company, will insure that the new buyer will be receiving title free and clear of all claims of others. In the event that another party later claims some interest in the property, the title insurance company will have to defend the new buyer's ownership of the property.
The way title insurance works in a real estate purchase is that a title insurance agent will conduct a title search, looking to make sure that the current owner actually owns the property, whether the current owner has any liens, judgments, mortgages or other such claims against the property, or whether any other parties have any rights to the property. The title agent will search the county land records to make sure the seller owns the property. The agent will also search the county land record to see if any other persons have any claims against the property such as mortgages, liens (which means that someone is owed money out of the property) or easements (the right of another to use some part of the property). In addition, the agent will look to see whether there are any restrictions that would prevent the buyer from using the property for its intended purpose. The agent will also search court records to see if the prior owners have any judgments because judgments become liens against the property.
The results of that search are reported in what is called a title commitment. The attorney for the buyer will typically order the title search and then review the title commitment to make sure that the buyer will be receiving clear title.
In many cases the current owner will have mortgages on the property that will need to be paid off at closing. Hopefully, the owner will not have any judgments against them. The property may be subject to claims by other parties, such as easements by utility companies to run wires and pipes both above and below ground to provide water, sewer, gas, electric, telephone, etc. to the property and neighboring properties. It is the job of the buyer's attorney to review the title search and determine what items are acceptable and what items will need to be removed in order to obtain clear title for the buyer.
The title charges shown on the settlement statement usually include the costs of the various searches, permitted title agent administrative charges and the premium for the title insurance. Like other forms of insurance, the various charges are filed and set by the New Jersey Department of Insurance. So in most cases, there is no benefit to the buyer to "shop around" for the best title insurance rates. However, if the property is being refinanced or sold and there is a prior title insurance policy available, there may be a reduced premium. The premium is a one-time payment and is paid at the time the property is purchased.
Like other forms of insurance, such as homeowners insurance or life insurance, the insurance runs only to the buyer that actually pays for it. So, for example, the fact that the prior owner had title insurance does not protect a current or future owner. Each owner must obtain a new search and policy to have coverage.
In the case of a refinance or re-mortgaging of the property, the new lender will almost always require a new search policy to protect the lender's new mortgage. This is called a loan policy, and it protects only the lender. It is required even though the owner may have a policy on the property.
In conclusion, title insurance is a form of insurance that protects the buyer's ownership of property from any claims by other persons. It is recommended that any time ownership of property changes, new title insurance be obtained.