Many items and terms thrown around when purchasing a house have the word "title" in them. It's just downright confusing. But you have to know what all these "titles" mean, do, and stand for. They are all important―some more than others―some cost you money and, fortunately for you, some cost the seller money. So I think the best way to address them all is to go down the list in the order in which you will encounter them as you work through the buying process:
- Taking title
- Title company
- Title search-title report
- Clear title
- Title insurance
Taking the Title
Who is going to take title to this house? In non-"title" terms, that is asking: Who is actually going to own this house? Make sense? How you "take title" is actually just the name of the person, persons, or entity that will own the house, and in what form.
Here are five ways you can "take title":
- You can actually hold title in your own name.
- Joint tenancy allows you to hold it with another person who has rights of survivorship. Generally this is used in marriages as there is an equal share of ownership and rights of survivorship.
- You can hold it with another person, which is called tenants in common. Under this arrangement, the share doesn't have to be equal and the interest may be passed to remaining owners or to others.
- You can hold title in a partnership, limited liability company, corporation, or trust.
- You can hold title with a legal spouse, which is called tenancy by entirety.
Taking Title with a Same-Sex Partner, a Friend, or a Relative
I am often asked to advise same-sex couples on the topic of homeownership. I think this is because there is so much uncertainty about the current legal policies and specific rights for gay and lesbian couples holding title together on their homes. Regardless of whether or not you're in a state that legally recognizes same-sex marriages, you need to protect your interests in the house you are about to purchase. Thus, in addition to taking title together either as tenants in common or under joint tenancy, you need to have an additional agreement.
For any couples who have yet to walk down the aisle, or who are not legally allowed to marry yet, it's important to draw up a contract with a real estate attorney before closing. Let's face it: as with traditional marriages, relationships, and friendships, compatibility with family members can often go terribly wrong. It's important to have a written agreement right from the very beginning that outlines the issues of who pays what. You need to define:
- What percentage of the mortgage is paid by each person.
- What percentage of the maintenance is paid by each person.
- Exactly what each person is entitled to if one person wants out of the property and the other one doesn't.
- And of course, how assets will be divided in the event of a split.
Nobody likes to talk about this stuff up front, but it's better to discuss these issues while everyone is lovey-dovey than to try to negotiate them later after things have turned ugly. So, with your lover, friends, and family . . . lay it all out in writing now.
As its name implies, a title company is the entity that handles:
- The title search and the preparation of the title report
- The assignment of "clear title"
- The issuing of the title insurance
Title Search-Title Report
A title search has to be done to make sure that the house and property you are about to buy is clear of liens, back taxes, or any other judgments held against it. The title search attempts to uncover any other people who have any legal right to the property or claim to have ownership besides the seller. It will also attempt to identify any restrictions to the property regarding use or development, such as height restrictions or an easement that could prevent an owner from modifying certain parts of the property.
The title report is the legal document that then presents all the findings of the title search. When it is presented to you during the closing for approval, review it carefully.
When someone asks, "Is there a clear title?" what that person really means is, "Did the title company do a title search and file a title report that shows the house can be sold exclusively to you with no strings attached?" A clear title indicates that a piece of property is owned "free and clear"; there are no liens or legal questions as to ownership of the property.
Once the title company has issued the title report and designated the property as having a clear title, it will issue title insurance. This is an insurance policy to protect you and lenders against financial loss resulting from undiscovered problems.
When you purchase title insurance, you are basically buying an insurance policy that covers you in case some long-lost relative comes forward and says he still has rights to the property. If he or she can prove it, you will have to pay that individual out. It also covers you in the case of a neighbor who comes forward and claims that the little pathway next to your house actually belongs to him. The title insurance policy will compensate you for financial losses resulting from that conflict.
Unfortunately title insurance is a necessary cost of buying a home. No matter who handles the closing, you must obtain this insurance to help cover any serious problems related to the ownership of the home once you have taken possession.
Before you secure a mortgage, lenders almost always require title insurance. Also keep in mind that you want to have your own title insurance. The lender will want title insurance for his or her company but that only covers the company if there's a problem. It doesn't cover you. It doesn't protect you.
How Much Does Title Insurance Cost?
I personally think title insurance is way too expensive and I am sure I will get some flak for this from title companies, but I would really like to know what percentage of title insurance policy holders have ever even filed and been paid on a claim.
The cost of title insurance varies state to state, and your agent should be able to advise you about the average costs in your area, as well as who normally pays for it. You do, however, want to err on the side of caution and ask for more coverage than the bare minimum. It's that old "you get what you pay for" thing. If you obtain a cheap policy, it may not be there to save you in the extremely rare chance that you run into serious troubles later on. So spend wisely.
Michael Corbett is Trulia's real estate and lifestyle expert. He is also the host of EXTRA's Mansions and Millionaires on NBC. In addition to his regular segments on ABC's The View and Fox News, he is a national best selling author with three critically acclaimed real estate books:Find It, Fix It, FLIP IT!; Ready, Set, SOLD! and Before You BUY! His years of experience in buying, renovating, and selling homes have made him a sought-after nationally recognized real estate expert.