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After an hour in the lawyer's conference room, you've signed
your name in half a dozen places and written checks for the
down payment and fees. Standing up and stretching, you shake
hands with the lawyer, the banker and the sellers. Despite
all your worries, the closing has gone smoothly and you're
free to gather up your papers, thank everyone and head down
the hall. Stepping outside, it hits you that you now officially
own that wonderful home.
You can't help peeking again at the paper with "Warranty
Deed" written in bold letters at the top. Everything looks
fine: the lengthy legal description, the sellers' signatures,
the statement in lofty language that you are the owner in fee
simple, to have and to hold said premises forever. The document
is authoritative, traditional and reassuring. So why did your
lender insist on title insurance?
Because residential property often has a long and convoluted
history of previous owners and transactions. You can't tell
by looking at the property and the current deed whether the
title is good, as if it were a grapefruit in the supermarket.
For all you know, the people you bought the house from might
have slipped out and gotten a second mortgage on the property
two days before closing, or neglected to pay a $5,000 special
assessment for the new sewer. Perhaps the swimming pool is
located right on the electric company's easement for underground
lines. Maybe the prior owner decided not to tell you that her
ex-husband has a lien, that is a claim on the property for
repayment of debt, on the house for half the proceeds of sale.
Title insurance is like a stockade fence around your property,
protecting it from pirates who might creep out of the past.
Chances are you'll never file a claim, but you'll be mighty
glad to have title insurance if you do.
To a great extent, securing title insurance is an exercise
in preventive law. Just as health insurance companies refuse
to insure people with a history of medical problems, title
insurance companies refuse to insure properties with a history
of legal uncertainties. Accordingly, the title examiner combs
the records with an expert eye and identifies any potential
problems, such as an unpaid tax assessment or a neighbor's
easement for right-of-way. The examiner then issues a preliminary
report called a commitment, which lists these defects and informs
you of any problems that the seller must correct prior to closing.
If the company isn't willing to cover a particular matter and
the seller can't or won't correct it, you have a choice whether
to live with the problem or bow out of the deal. If a title
insurer refuses to write the policy at all, you can bet that
the seller can’t give you good title.
But even a stout stockade fence can't protect you from bolts
out of the blue. Title insurance policies clearly state that
they don't cover matters that arise after the effective date
of the policy. So if a court files a judgment against you two
months after closing, secured by a lien on your house, that's
not the title company's problem. Nor is the city's decision
to condemn your property to build a new fire station. And because
title companies refuse to insure risks they discover in their
search, the insurance policy covers only surprises: hidden
problems caused before the effective date of the policy but
only coming to light later.
That's why it's important to know not only what your title
insurance will cover, but also what it won't: what scenarios
might arise in the future that would challenge your title
to the property. This chapter offers an introduction to titles,
title insurance and various encumbrances that could endanger
your ability to enjoy your home.
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