Most commonly used in the state of Maryland to protect a buyer and ensure that title to a property is clear and marketable in a real estate transaction, is the purchase of a title insurance policy.
Title insurance provides the policyholder protection from losses that may arise from defects in the title.
The Maryland Association of Realtor Contract of Sale calls for title to property to be “good and merchantable, free of liens and encumbrances.”
To be marketable, title must disclose no serious defects, not expose a purchaser to any litigation, and convince a reasonably well-informed purchaser that he/she can sell or mortgage the property at a later time.
It is up to the title insurance company to determine whether or not the title is insurable, based on the results of a title search.
A title search is an examination of all the public records done when a property is under contract to determine whether any defects exist in the record of a property’s ownership, also called the chain of title.
Title is traced back 40-60 years, and other public records are examined to identify wills, judicial proceedings and other encumbrances, such as taxes or special assessments, that may affect title.
There are different levels of coverage including standard coverage policies and extended coverage policies. Standard coverage policies normally insure the title against items found in the public records, but also hidden defects such as forged documents or improperly delivered deeds, for example.
Extended coverage policies may include additional protections against defects that may be discovered by property inspection or unrecorded liens not known by the policyholder.
Title insurance policies generally define some exclusions, or items that they won’t insure. These can include items such as zoning ordinances, restrictive covenants, easements and current taxes and special assessments.
There are two types of policies depending on who is named as the insured. One is called the owner’s policy and the second is called the lender’s policy.
If purchasing a property by way of a mortgage, the lender will require the lender’s policy for the benefit of the mortgage company’s protection, but purchasing the owner’s policy is an option for buyers.
And, if the seller of a property has their original title policy documents, they can provide those to a buyer, which allows the new buyer to get a “re-issue” rate savings on the purchase of their owner’s policy.