Home Buying

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Deeds, Titles, and Title Insurance

Terms you should know about owning a home.

While the real estate purchase contract is used to set out the terms of the sale, the deed is the document that actually transfers ownership of the property. Your contract will specify the kind of deed you'll receive. The best kind of deed from a buyer's point of view is what's known as a "full covenant and warranty" deed. When you receive this kind of deed, the seller promises that there are no encumbrances or defects in the title to his property other than the ones he discloses in the deed. An "encumbrance" may be an easement that gives someone else the right to use a part of the property, or zoning regulations or a covenant in the seller's deed that restricts the way in which the property can be used by its owner. A "defect" may be a forged deed that was given at some time in the past by a previous seller who didn't actually have the right to sell the property. If it later turns out that there are any defects or encumbrances which the seller didn't know about or failed to disclose, the buyer can file suit for any damages that he suffers as a result of the defect.

A deed "with covenant's against the grantor's acts" states that the seller hasn't done anything to cause a defect or encumbrance other than what he has already disclosed, but it releases him from liability for defects caused by a former owner that are unknown to him at the time of the sale.

A "quitclaim" deed provides no warranties at all. It doesn't even promise that the seller actually has any interest in the property he's selling. It merely states that if he does have an interest in it, he's transferring that interest to you. Accepting a quitclaim deed can be risky, and you probably should get some professional legal advice before you agree to do so.

Your real estate purchase contract will also include a clause about title insurance. Title insurance is designed to protect the buyer, as well as the mortgage lender on the property, from losses that result from any known or unknown defects in the title you receive from the seller. As the buyer, you'll probably be required to purchase a lender's title insurance policy to protect the mortgage company or bank from losing its interest in the property. But you'll also want to obtain an owner's policy to protect your own interest in the property from a potential claim that your title is defective.

Typically, a title insurance policy is purchased by paying a one-time fee equal to around one percent of the purchase price of the property. In some parts of the country, the buyer pays for this policy, while in other parts of the country, the seller provides it, but in any case it's an item that can be negotiated between buyer and seller.

What kinds of title "defects" will a title insurance policy protect you from? As we've already mentioned, a forged deed can create a real problem if someone who would have a claim to the property shows up in the future. Another problem that can arise occurs when you purchase a home from the person whose name appears on the deed to the property as the sole owner. Unknown to you, however, the seller is married at the time the sale takes place. Even though the deed to the house is in his name alone, the seller's spouse may be legally entitled to a share of the house, especially if its located in a community property state. Years later, that spouse could raise a challenge to your ownership of the property.

Title insurance protects you from this kind of claim, but it usually protects you only up to the limits of the purchase price of the property. So if you purchase a home for $100,000, your protection extends to that amount. If the house appreciates in value over the years, and is worth $300,000 at the time the claim is made, your protection is still only $100,000. Be sure to read the terms of your policy carefully so that you understand any limitations on the coverage it provides.

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