If you’ve ever been on the market to purchase a new home, or even if it’s your first time, chances are you’ve heard plenty of industry terms. Some of these terms are quite common, like mortgage and interest. Other terms are a bit more muddy, like escrow, liens, and titles.
It’s rare to go through a home purchase without encountering the industry lingo, and possibly learning something new while you’re at it. Still, learning these terms and having a deeper understanding of what your lender, broker, or realtor is talking about before attending closing is a much better position for any home buyer to be in. Particularly important to home buyers is the term “title” as it will come up dozens of times, and is sort of the point of buying a home in the first place.
That’s right, property titles are seldom understood beyond what is shown on TV, and are often confused with other important homeowner-related documents such as deeds. Simply knowing the difference between the two is a good enough head start in understanding exactly what a title is.
Even so, there are more pieces to the puzzle when you consider such things as the purpose of title companies, and the need for title insurance.
If you’re currently in the process of buying a home, this may be the perfect time to learn all there is to know about property titles. If you’re a longtime homeowner, perhaps there are a few things left to learn on the topic, too.
In this guide, we will explore what a title is as well as what it isn’t, and explain the purpose of title companies and title insurance. Let’s start with the basics.
What Is a Property Title?
What’s a property title? A property title is a bundle of rights for a real property that is owned or partly owned by an individual or party. This bundle of rights not only proves you own your property, but also dictates the rights an individual, party or individual members of a party that shares ownership has in relation to usage, sale, or modification of the property.
Now, the purpose behind a property title has always been to show the controlling interest of a property. It is more of a legal term than anything else and it’s really important when buying or selling a home. After all, possessing a property, even for a lifetime, doesn’t matter in the least if the title shows that someone else holds all of the rights of usage and ownership.
It may be a little complicated, but explaining title requires a little knowledge of legal terminology.
Possession
For starters, let’s define “possession.” We know it is super tempting to shrug it off as simply 9/10ths of the law, but that isn’t the angle we’re taking here. Possession, as defined by law, is the actual holding of a thing, regardless of an individual's right to do so.
For example, if you find a marble on the floor and pick it up, you are now in possession of that marble. It may or may not be your marble, but as you are currently holding the item, you are in possession of it.
It’s sort of the same in regards to a property -- that is, you can inhabit a property, without any legal rights to do so, but technically you are in possession of that property at the time.
Right of Possession
Then, of course, there is the Right of Possession. The right of possession dictates the legitimacy of possession (regardless of actual possession). If there is evidence to back up the claim of right of possession, then it will be upheld by the law unless a stronger claim can be proven.
The right of possession can be proven through a documented purchase or other legitimate means of transferal of ownership of an item or property.
Right of Property
Finally, there is the right of property, which may be one of the hardest things to actually prove, but still trumps the rest if it can be proven. The right of property is the absolute claim of rights and control over a property, the collective rights of which are referred to as “title”. If the right of property can be proven, it is the strongest claim to a property, and therefore has the power to defeat the other claims in court.
Now, here’s the strange part: when regarding the same property, each of these three concepts (possession, right of possession, and right of property) can be applied to a different individual. For example, while you may be in possession of the hypothetical marble from earlier, let’s imagine that it fell out of another individual’s pocket, we’ll call him Bob. Bob was in possession of the marble for a few months, after stealing it from a third individual, who we will call Mari.
In finding out that you have the marble, Bob has multiple witnesses that prove he was in fact in possession of the marble before you. Police get involved, and because of the witnesses involved, Bob has the right of possession even though you currently have possession of the marble. Still, all of the proceedings brings the situation to Mari’s attention, who now produces an old family will, in which the marble is described in full and shown to have been bequeathed to her a decade ago.
Now the police verify that the marble in question is the very same marble from Mari’s ancestor’s will, which should rightfully belong to her. In this case, now they are positive that Mari has the right of property, and the marble is returned to its rightful owner. So you see, ownership of a property can be split among different interests, and a title brings some order into what could very well be a chaotic situation.
As a matter of fact, keeping track of these different ownership rights is why titles are so important, and why they were created in the first place. A good property title is meant to be the unification of these concepts attributed to one individual or entity. At the very least, it should convey the last legal owner of a property.
What’s the Difference Between a Title and a Deed?
Now that we have a better understanding of what a title is, we can finally separate it from the other popular document that always gets brought up when discussing home ownership: a deed. While the two are very closely related, they are not synonymous. A title has its own specific purpose, as does a deed.
To be fair, there can be no deed without a title. A deed is a legal document that confirms a stake of interest, right, or possession of a property, and is the legal document that records a transfer of title. So, technically, it is a strong legal argument for the right of ownership, only in the sense that it confirms that the title of a property has legally been transferred to the individual or entity named in the deed.
While movies and pop culture in general always tend to focus on the deed to a property being lost or stolen, it would be equally tragic to have lost a title. You could almost say that a deed is a proof of title ownership, while the title is proof of property ownership. They are equally important, but still, have separate uses and purposes.
What Is a Title Company?
Having a clear record of title for a property is extremely important to the home purchase process. You’ll need to know who the actual owners of a property are before trying to purchase it. This is just as important as having the title transferred to you after the purchase is complete.
For this reason, no mortgage transaction is final without the help of a title company. The title company ensures the legitimacy of a title a piece of real estate so that a home buyer can be sure that they will become the rightful, legal owner of a property once they’ve bought the real estate. Title companies also function to provide title insurance, should any lawsuits or claims to the property occur once the title is transferred.
How Does a Title Company Determine if a Title Is Legitimate?
The most important duty for a title company is to determine whether a title is legitimate or not. A title is not just a simple legal document. As part of a mortgage transaction, it holds the legitimate ownership rights to properties that individuals or families invest large sums of money into. In that sense alone, the legitimacy of a title is of the utmost importance to the parties involved in a mortgage transaction.
Title companies are typically brought in during a mortgage transaction to ensure the legitimacy of the title that will be transferred to the new homeowner. To do this, the title company will perform a title search. Title searches are meant to identify any relevant ownership interests in the property. They also establish regulations concerning usage of the property.
In a title search, the entire recorded history of a property is scrutinized. Title companies search for any and all documents that pertain to the piece of real estate in order to uncover the ultimate controlling interest in the property. This helps ensure that the buyer will, in fact, be purchasing the rights of ownership from the rightful owners.
Title searches are meant to answer three specific questions:
Is the seller within their legal rights to sell the property?
Are there any restrictions or allowances pertaining to the usage of the land?
Are there any liens that exist on the property that need to be paid off at closing?
When a title company performs a title search it is an extremely detailed examination of all known land records, deeds, and relevant legal documentation pertaining to the property. Their access to government databases for these documents makes it much easier for them to do an accurate title search than the average person. However, anyone could technically perform a title search -- but it’s best to work with professionals when so much is at stake.
The ultimate goal here would be to produce a pristine, market-ready title for the mortgage transaction. Of course, this isn’t always the result. In some cases, liens may be placed on a property, often by creditors, and even local governments for the sake of unpaid property taxes.
Any outstanding claims to a property can and will affect the sale, and the ownership rights of the buyer. That is why you’ll have to deal with claims before the mortgage transaction is completed at closing. Even if all seems okay, it’s still wise to purchase title insurance as an added layer of protection against the third party claims to the property.
What Is Title Insurance?
A title company that has concluded its title search and is standing by for the mortgage transaction to be completed often offers title insurance to the home buyer. Title insurance may seem excessive, but with an investment as large as a home purchase, one can never really be too safe.
A title insurance policy protects lenders or owners against any claims or legal fees that may come about from disputes or claims over the ownership of the property. Title insurance exists in two forms: one that is meant to protect the property owner, and one that is designed to protect the lender.
Lender’s title insurance is paid by the home buyer as a standard part of the closing, and owner’s title insurance can be paid for by the seller, but in many cases must be purchased by the buyer as well.
In either case, title insurance serves as financial protection. For example, let’s say a mortgage transaction is completed, and the title is transferred to the home buyer. Shortly after, an individual makes a claim that they were the actual, rightful owner of the property that was sold.
If the individual is the actual owner, the title insurance would compensate the policyholder for the value of the home. It may be a rare occurrence, but you can imagine the nightmare that would ensue if the buyer didn’t have title insurance at that point.
What Is the Cost of Title Insurance?
The cost of title insurance varies based on the state in which the property is located as well as the price of the home. Still, a title insurance premium is a one-time fee paid at closing, not a recurring fee that must be paid monthly over the life of the loan.
Typically, a loan of around $100,000 could garner a premium anywhere from $175 to $900 depending on the state the property is located in. Even so, there is great reward in shopping around for a buyer’s title insurance policy. Some companies even offer a discounted price when the property has recently been sold prior to the current transaction it is involved in.