As houses are bought and sold, a statement of each transaction is maintained in local public records. These records show not only who owns the property but whether it is free of any debt.
The information in public records is used by the settlement provider to clear any debts that are the obligation of the seller and to assure that property can convey without difficulty.
However, there are cases where not all information is found on public records. It may be that a past owner was a habitual drunk, mentally incompetent or secretly married. Or, a deed may have been forged. While these and other examples are hardly common, they can place a "cloud" on the ownership of the property.
To assure that purchasers are protected from unrecorded problems, lenders require the purchase of title insurance at settlement. Basically, there are two forms of residential title insurance.
"Lender's" coverage will protect you from an unforseen claim to the extent of the mortgage; that is, as the mortgage ballance declines, so does the level of coverage. "Owner's" policies protect your original equity in the property. If you purchase a home for $150,000 an owner's policy will protect you to that limit, regardless of your mortgage balance.
In situations where there is a cloud on the title, it may not be possible to get title insurance, or there may be an exclusion to the policy. In either case, if your contract provides that you were guaranteed a good and marketable title, you may not be required to complete the sale. Contact your attorney for specific advice.
While there is little question that title insurance can offer protection against unrecorded property claims there is considerable debate about marketing practices associated with the sale of title insurance.
For example, in Maryland a settlement provider often receives a 50 percent commission for selling title policies.
Buyers can reduce title insurance costs significantly, say from 10 to 25 percent, by having policies reissued when possible. While the practices of title insurance companies vary, policies can often be reissued in cases where there has been a title search in the past five to 10 years. Purchasers should specifically ask about reissue rates, particularly when buying a new home or condominium unit.