If you are buying real estate, you may have heard of title insurance. What is title insurance? Is it required in Michigan? What does it do, how much does it cost, and how do you get it? Perhaps most importantly, what are the risks if you don’t have title insurance? This blog post will answer these questions, and some of the others our practice receives about this type of insurance.
What is Title Insurance?
While most types of insurance protect you from things that might happen in the future, title insurance protects you from things that happened in the past. For instance, when you buy car insurance, you are protected in case your car is in an accident. When you buy health insurance, you are protected against the cost of future medical care. Title insurance, on the other hand, protects an investment in real property (real estate) that might be at risk due to a past event, such as an undiscovered lien against the property.
Title insurance does not just protect you, as a purchaser of property. Your mortgage lender will likely require you to have title insurance in order to protect their security interest in the property you are buying.
Are There Different Kinds of Title Insurance?
There are two types of policies. A lender’s policy will reimburse your mortgage lender for any payments you are unable to make because you do not have clear title to the property and lose it to another party. The lender’s policy also pays the lender’s attorney fees and costs in pursuing their legal rights regarding the property.
An owner’s policy protects you against loss and will pay any legal fees you have regarding a dispute over title to the property.
Do I Have to Purchase Title Insurance in Michigan?
State law does not require you to purchase title insurance in Michigan. However, if you are purchasing real estate with a mortgage, your lender, as noted above, will probably require you to have it. After all, your payments to the mortgage company are secured by the property you are buying. If you do not make your mortgage payments, the lender will foreclose on the property. If it turns out you don’t have clear title to the property, they might not get their money.
So, if like most people, you use a mortgage to buy property, your lender will make you purchase lender’s insurance, and probably owner’s insurance, too. Even if you are not required to buy owner’s insurance, you should have it, since it protects you against loss—possibly significant loss.
What Could Happen if I Don’t Have Title Insurance?
In the worst case scenario, you could lose your house, or lose a lot of money. Before you buy your property, the title insurance company (or, less commonly, your own attorney) will do a “title search.” This is a search of public records to ensure, among other things, that the person selling the property to you really owns it and has the right to sell it, and that there are no liens against the property. A lien is a claim against property until a debt owed by the property owner is discharged. If any defects in title (also known as “clouds”) are found during the title search, they are the responsibility of the seller. He or she may be able to cure the defects, or you can walk away during the sale. If defects in title are missed, however, you could be on the hook.
For example, a lien travels with the property, not the debtor. So let’s say a previous owner of your house had the kitchen remodeled. He failed to pay the contractor the $30,000 owed, and the contractor had a lien against the house for that amount.
If the title search failed to discover the lien, and you purchased the property, the lien would become your problem. Now that it is known, you will have to satisfy it, most likely out of the proceeds of the house if and when you sell it.
Having to satisfy a lien created by someone else’s debt is bad enough, but not having clear title means you could lose your house, because someone else has a legal right to the property. This could happen in a number of ways. Someone could deliberately defraud you, such as a renter of property pretending to be the owner so that they can sell it. A previous seller might have made a mistake, such as a vacation cottage co-owned by cousins who had fallen out of touch. One cousin, not knowing the other’s whereabouts, might sell the property, unaware that the missing cousin needed to sign off on the sale. Another possible scenario involves inheritance. The previous seller might have inherited the house under a will that was outdated or improperly executed, meaning someone else really owned the property and your seller did not have the right to convey it.
How Likely is There to Be a Problem With My Title?
Candidly, not very likely. If there is a problem with title, it will probably be discovered during the title search. That said, it is still worth it to buy title insurance, even if you are not required to, Title insurance is not terribly expensive; it is usually in the neighborhood of $800-$1000. Compared to the risk of losing a house worth hundreds of thousands of dollars, that’s a comparatively small amount.
Put another way, you don’t buy title insurance because you are likely to need it; you buy it because if you do end up needing it, the risk of loss will be so great.
How Do I Get Title Insurance?
Typically, once you sign your purchase agreement, your attorney or closing agent will put the process in motion. There is no need, and typically no ability, for you to “shop around” or look for a policy. There are a few major title insurance companies, and your attorney or agent will select a policy from one of these.