California Title Insurance: Protect Against Hidden Encumbrances

California Title Insurance: Protect Against Hidden Encumbrances

Have you ever heard a story about someone purchasing a home only to discover later that someone else claimed partial ownership or that an unpaid lien remained attached to the property? Issues like these can turn a dream home into a financial nightmare.

A property can have various ‘burdens’ on its title and while California law requires sellers to disclose known encumbrances, unforeseen issues can still surface. That’s where title insurance comes in. This article explains what title insurance is, what it covers, how it works, and why it’s so crucial for homebuyers in California.

What is Title Insurance?

Title insurance is a specialized insurance policy designed to protect your ownership rights and financial investment in real estate. Unlike homeowners’ insurance, which covers future events like fire or theft, title insurance safeguards you against past events that might affect the validity of your property’s title.There are two main types of title insurance policies:

1. Owner’s Policy: This policy protects the buyer’s interest in the property. It covers you up to the purchase price, shielding you from potential legal costs or financial losses if any undiscovered issues arise.
2. Lender’s Policy: Almost always required by lenders, this policy protects the mortgage company’s interest (usually up to the loan amount). If you finance your home with a mortgage, your lender will insist on a lender’s policy to ensure its investment is protected.

What Does Title Insurance Cover?

Title insurance shields you from problems that could emerge from previous owners or mistakes in the public record. Below are five common scenarios (out of many) that title insurance might cover:

1. Undisclosed Encumbrances:
   Sometimes, encumbrances such as easements or liens don’t appear in the initial public record search. For example, an easement that wasn’t properly recorded could give third-party rights to your property. Additionally, unpaid property taxes, mechanic’s liens (filed by contractors or builders for unpaid work), judgment liens, or even unrecorded mortgages may exist without your knowledge.
2. Errors in Public Records:
   Even minor clerical errors in deeds or misindexed documents can create significant complications. Mistakes like a misspelled name or wrong property description could lead to ownership disputes.
3. Fraud and Forgery:
   Unfortunately, identity theft and document forgery are realities in real estate. A past owner’s signature might have been forged on a deed or other legal document. Title insurance covers financial losses you could incur if you must defend your ownership against fraudulent claims.
4. Claims from Heirs:
   In some cases, a property might have been passed down through inheritance, and an undisclosed heir could appear, claiming rightful ownership or interest in the property. Title insurance protects you from these unexpected claims.
5. Boundary Disputes:
   Encroachments, as we learned, are a type of encumbrance. They arise when a fence, shed, or other structure crosses a boundary line. If a past survey was inaccurate or if a structure was built in the wrong place, you could face legal or financial consequences.

Real-World Example:

Imagine buying a home, moving in, and then receiving a notice stating that a builder had never been paid for renovations done by the prior owner. This builder filed a mechanic’s lien, which went unnoticed. Title insurance would pay off or resolve this lien, sparing you a significant financial burden.

The Title Search and Commitment

Before issuing a title insurance policy, the title company thoroughly examines county records, court filings, and other public documents to uncover any problems or “clouds” on the title. This extensive research helps identify mortgages, liens, easements, or other encumbrances that might affect ownership.

Once the search is complete, the title company issues a “title commitment” or “preliminary report.” This document details all the findings and lists any “exceptions” that the policy will not cover. Standard exceptions might include existing easements or restrictions on the property. It’s crucial for buyers (and their real estate agents or attorneys) to carefully review the title commitment before finalizing the purchase. If any red flags appear, you can address them or negotiate with the seller before closing.

How Much Does Title Insurance Cost?

Title insurance is typically a one-time premium paid at the real estate transaction's closing. In California, the cost varies based on the home’s purchase price and the county. It’s customary in many parts of California for the seller to pay for the owner’s policy, but this is negotiable.

Why is Title Insurance Important?

1. Financial Protection: Title insurance can save you from hefty legal fees or financial losses if a hidden title defect surfaces.
2. Peace of Mind: Knowing your ownership is shielded from past claims helps you focus on enjoying your new home.
3. Facilitates Future Transactions: A clear and insured title makes it easier to sell or refinance. Prospective buyers or lenders feel more comfortable knowing your property’s title is clean.
4. Legal Defense: Many title insurance policies cover the costs of defending against lawsuits challenging your ownership. In short, title insurance protects your wallet and your peace of mind.

Title insurance is crucial in the California home-buying process, ensuring that hidden encumbrances or past errors won’t jeopardize your investment. Discuss coverage details with your real estate agent, lender, or attorney for the best protection—putting into practice what you learned in real estate school.

Love,

Kartik