In the real estate business, agents, closing attorneys and lenders often use the term “clear title” when referring to a particular piece of property. What does it mean for an owner to have “clear title” to a piece of property? How does an agent, closing attorney, lender – or a buyer and seller – know that the seller of a property has “clear title” or that the buyer of a property obtains “clear title” from a seller?
First, exactly what does “clear title” mean? In its strictest sense, it means that the seller of a property will sell that property to a buyer without any “liens” or “encumbrances” that affect that particular property. Sometimes, you may hear the term “marketable title” used instead of “clear title.” A “lien” includes, for example, an outstanding mortgage or civil court judgment against the seller, or a municipal filing that the seller owes money for sewer or water service. An example of an encumbrance might be an easement giving someone the right to cross the property to access another parcel of property or for a utility company to run power lines above or underneath the property. Because mortgages are very common, as are easements, it would be a rare thing for a property owner to have “clear title” to property, particularly in a populated area or in a subdivided development.
Fortunately, “clear title” in terms of everyday real estate transactions does not necessarily mean that the property has no matters recorded in the public real estate records affecting the property. In practical real estate practice, the term “clear title” has come to mean “insurable title.” That is, title that does not have any mortgages or liens recorded against it at the time of sale, but which may have easements, subdivision covenants and restrictions, or other documents representing rights held by others that may impact the property, but which do not affect an owner’s use and enjoyment of the property to an unreasonable degree.
How does a real estate agent, mortgage company or closing attorney go about determining whether or not a seller has insurable title to a particular piece of property? The real estate professional will order a title insurance commitment from a title insurance agent. TitleSouth is a title insurance agent. A title insurance agent has an agreement with one or more title insurance underwrites that allows the agent, once certain conditions are met, to issue a title insurance policy to the owner of the property or to the mortgage company making a loan to the lender. TitleSouth issues title insurance policies on behalf of Stewart Title Guaranty Company and other underwriters.
Once the title insurance commitment is ordered, the title insurance agent will undertake a search of the public property records to ensure that the current owner of the property actually owns the property, that no other individuals or entities have an ownership interest in the property, to determine whether or not there are any mortgages or liens filed against the property and whether or not there are any encumbrances that affect the property. A title insurance property search will examine all of the documents filed in the public property records for up to forty years prior to the date of the order and, once the research is completed, the title insurance agent will prepare a “Commitment for Title Insurance.” The Commitment for Title Insurance will list the current owner of the property, as well as any matters in the public records that need to be addressed before the current owner can transfer “insurable title” to a new owner, or, in the case of a mortgage, to the mortgage holder under the terms of a mortgage.
Real estate agents, mortgage companies and closing agents (such as real estate closing attorneys or title insurance agents acting as settlement agents for a property sale or a mortgage) examine the title commitment to see what actions are necessary in order for the planned sale or mortgage to take place. Often, nothing needs to be done other than to pay off the current owner’s mortgage against the property at the time of the sale. Other times, there will be defects in the documents in the public records that need to be corrected (for example, the property may not have been properly identified in a prior deed, or an old mortgage may not have been satisfied in the public records), and the real estate agent, seller, closing agent and the title insurance agent may work together to ensure that those matters are addressed and corrected before the sale of the property.
Once the sale of the property has occurred, the settlement agent will provide the title insurance agent with a copy of the deed transferring the ownership of the property, a copy of the mortgage that the buyer used to acquire the property (if there is one), as well as copies of any documents that show that any matter the title insurance agent required to be addressed has been addressed (such as evidence that the seller’s mortgage has been paid in full and satisfied on the public records, or that an affidavit correcting an error in a prior deed has been executed and filed in the public records).
Once the title insurance agent has received these documents and the premium required for the issuance of the title insurance policies, the title insurance agent, on behalf of its allied title insurance underwriter, will issue to the new owner of the property an “Owners Policy of Title Insurance.” This insurance policy protects the owner of the property in the event that it turns out that there was a defect in the title – that is the quality of the ownership of the property – that the new owner received from the seller of the property. Note that some encumbrances that are common will be listed on the policy and the policy will not provide title insurance coverage related to those matters. Subdivision covenants and restrictions and easements are common examples of the excepted encumbrances.
A title insurance policy is like any other insurance policy – it protects the owner in the event of a loss or damage that is the result of a matter that is covered under the terms of the policy. If the new owner obtained a mortgage to provide the funds for the purchase of the property, the lender also, in most cases, will obtain a “Mortgagee’s Policy of Title Insurance.” This, like an Owner’s Policy, is an insurance policy that protects the lender in the event there is a defect in the quality of the owner’s title to the property. An Owner’s Policy of Title Insurance is in effect for as long as the owner holds title to the property. An Owner’s Policy of Title Insurance may even protect the owner from being responsible for any defects in the title to the property that are discovered after the owner sells the property. A Mortgagee’s Policy of Title Insurance protects the lender for the period of time the loan is outstanding. In the unfortunate event that a lender is forced to foreclose on a property, the Mortgagee’s Policy of Title Insurance will ensure that the lender can conduct the foreclosure and then remarket the property after the foreclosure without any hindrance arising out of matters that arose before the lender made the loan.
Sometimes a buyer might say to his or her real estate agent “why do I need title insurance? I’ve heard that title insurance companies never have to pay anything.” This statement is not true. Title insurance underwriters pay millions of dollars in claims every year to compensate policy holders for monetary losses incurred as a result of a covered claim under their policy. In addition, title insurance underwriters, pay millions of dollars each year in legal fees to correct title issues that are covered under an owner’s or lender’s title policy. Finally, the title search that is done prior to issuing the title insurance commitment often reveals matters that would otherwise affect a property that can be corrected prior to or at the time of the sale of the property. Without the title search, these defects may have been unknown until such time as someone asserted an interest in the property. Title insurance therefore, protects the American Dream – the home – and gives the owner peace of mind that he or she actually purchased what they intended to purchase, without worrying about anybody else claiming an interest in the property.
So what about the cost? Title Insurance is an investment in your home. The cost is determined by each individual underwriter, and in Alabama, each underwriter must file its title insurance premium rates with the Alabama Department of Insurance. Generally, title insurance rates begin at approximately $3.00 for each $1,000.00 of coverage for an Owner’s Policy. The amount of coverage generally is the amount of the purchase price of the property. As the purchase price increases, the rate per thousand dollars of coverage may decrease. The premium for an Owner’s Policy of Title Insurance is paid at closing. The premium for a Mortgagee’s Policy of Title Insurance, when issued at the same time as an Owner’s Policy of Title Insurance generally is nominal ($75 – $150 in Alabama) and in some areas of Alabama, it is customary for the total cost of the two policies to be shared equally between the buyer and the seller.
We encourage every purchaser of property to obtain an Owner’s Policy of Title Insurance. By doing so, you are purchasing piece of mind, and protecting your American Dream.
For more information on title insurance, you may visit www.titlesouth.com or www.alta.org (the website of the American Title Insurance Association).
-Written by Pat Smith