While discussing your home, Title isn’t the most exciting dinner conversation, but it’s important. Here’s a quick read on the highlights and nitty gritty of it.
What is the Title of your home?
The title to your car is a piece of paper, the title to your house however is not something concrete - it’s the rights of ownership. Title refers to the legal ownership of a home. It proves that you own the property, and have the right to sell it by transferring your ownership to someone else. A common mistake is interchanging title and deed. Although they go hand in hand they are in fact two very different things. The deed is the actual document that records any changes or transfers of title to the property. You can hold a copy of the deed in your hands and put it in your safety deposit box, but it’s digitally recorded by the city and can be referenced electronically.
What is a Title Search?
Aa a buyer, a title company conducts a search on the property’s ownership history to prove that the seller is actually the owner of the property and has the legal right to sell it. The search will also reveal any liens such as an unpaid water bill, overdue and unpaid taxes, outstanding child support or lawsuits, or any such flaws that will need to be cleared before the clean title can be issued. More often than not, the title of your new home-to-be will sail through the search with flying colors and come back clear. Sometimes it hits a snag, and our preferred title company works with you to clear up the issues so you can close. No need to panic!
We asked Megan Butterworth, from Class Abstract and Northwest Abstract Title Services what a common flaw on title may be? “We see a lot of need for a Letter of Indemnity. This is when we reach out to the seller’s title insurance company and underwriter to ask that they provide a letter that will clear the title from a prior owner issue - most common are old mortgages that were never satisfied or Estate issues that cannot be found in public record. “
If you encounter a title with complications on your home search, your knee jerk reaction may be to walk away, however, Megan shares that, “Nothing is impossible, but there are a lot of things that take time to clear, so it depends on how willing buyers and sellers are to wait out the process and how cooperative the parties are.”
What is Title Insurance and who needs it?
Once a title is clear it’s time to take title insurance. We typically think of insurance as a monthly fee, and as coverage that provides us protection in the moment. Title insurance is a bit different.
Cost
A one-time payment that is made at the closing table for the policy in total. It ensures your ownership through to when you sell so you do not want to hire an out-of-state discounted title service. It’s better to use an insurance company that will be around for 7-30 years. Pricing for Title insurance in Pennsylvania is set by the state and is based on your sale price. The least expensive policy is for sales up to $30,000 and costs $569.00. The policy premium increases along with the price of the home.
Enhanced vs Standard Coverage
Title insurance provides protection against any previous history of the property before you became the owner. It’s insurance that states yes, this title is clean, and if something comes up in the future that was missed in the initial search, the title insurance company will settle with you or the previous owner.
There are two types of coverage, standard and enhanced. Megan advises you sign up for enhanced whenever it’s available “ it's only available for individuals for their primary property (investors are not eligible for the enhanced policy). The enhanced policy offers a lot more coverage for only a slight increase in premium. The premium difference is 10% more than the standard. It protects against future issues, such as post-policy fraudulent deeds (which occurs a lot in Philadelphia), permits that weren't pulled, etc...it's a lot more bang for your buck.”
In this Enhanced Policy Information Sheet, there’s a chart of what each type of policy covers, and how they compare.
Who needs It?
If you purchase your home with a mortgage, you are required to have title insurance. If you purchase with cash, it’s your option. However, it’s highly recommended you opt for insurance to protect you from fraud and liens or debts attached to the property. When you sell your property, if anything like that comes up, the title insurance you took when you purchased it will come in handy.
Taking Title
When you purchase a house it may be with your partner, it may be with a family member, a friend, solo, or another creative combination. Many factors can determine how you hold title: how many buyers there are, how you’re related, what percentage of ownership each person is taking, and how you’d like to pass ownership on if one person wants to sell or passes on.
For example, if your parents are co-signing your mortgage they might be a buyer, but not an owner on deed or title.
Or
You’re buying with a friend (you’re not married) and the friend is putting in $5,000 and you’re putting in $45,000. You can split your percentage of ownership.
Or
You and three partners are buying a property in order to qualify for a large mortgage, but you plan to buy them all out eventually.
Tenants by Entirety
This option of taking title is only available to married couples. You and your spouse “become one”, and both own the property 100%. If your spouse dies, you would continue to own the property 100%, this happens automatically, no need to adjust any paperwork through probate. If you divorce, however, the terms of the divorce will determine what is done with the property.
Under this type of tenancy, a creditor can not place a lien on the home if one spouse has a debt. However if the debt is owed by a married couple, then that protection is no longer in place, and the home can be used as collateral.
For example, if Doris owns a business and she defaults on her small business loans. As she and her wife own their home together as Tenants by Entirety (TBE), the collections company can’t use the house as collateral. However if Doris and her wife both owned the business together, then a lien can be placed on the home.
Joint Tenants with Rights of Survivorship
Some think Joint Tenancy is similar to Tenancy by Entirety, just without the ring. Although that’s a main distinction, there are a few other differences. You don’t own 100% of the property as individuals. If two people buy a property and take tenancy as Joint Tenants with Rights of Survivorship (JTROS), then they each own 50%, if three people purchase, each would own a third, and so on.
As an example, if Tenille, Jeff, and Marissa own the property together, and one would like to sell their third, they would all have to agree in order to move forward. In the event of Jeff’s death, Tenille and Marissa would inherit his share equally. And as for those pesky creditors… they can place a lien against an owner’s share, but can not exceed that percentage.
Tenants in Common
Tenants in Common allows multiple owners to share different percentages from one another.
Let’s say you and your brother are looking to purchase a property. He has 60% of the funds, and you come through with 40%. You purchase together and you take title as Tenants in Common. You would own 40% of that property, but you both can spend as much time on the property and use all the rooms and land on the property, even though you only put 40% of funds into the pot. You and your brother each hold title separately, therefore, if you go into debt, a creditor can put a lien against the property up to the percentage of your ownership. In the case of death, each owner’s % of the property will be passed on to their heirs. It will not be automatically passed on to the other owner.
Title is one of those mysteries of homeownership, where really it’s best when the experts sit down and explain your specific situation. If you have further questions, don’t hesitate to reach out to us or get in touch with our Title partners at Elfant Wissahickon Realtors.
Olde Kensington (not to be confused with East Kensington or Kensington) is centrally located, bordered by Norris Square, Fishtown, Northern Liberties, and Ludlow. This pocket of Philadelphia offers a wonderfully central and vibrant place to call home.