What is a title search, what documents does it examine, what is the abstract of title, and how do owner's and lender's title insurance policies differ?

Transfer of Property on the Real Estate Exam

Title companies perform searches before issuing title insurance, and agents must understand what a title search reveals and what title insurance covers. Exam questions test your knowledge of what documents are examined, the difference between owner's and lender's policies, and how title defects are resolved. Understanding title insurance is essential to protecting clients and managing transaction risk.

Understanding Transfer of Property: Key Concepts

What It Means

A title search is a thorough examination of all recorded documents affecting a property. The title company searches the property records at the county recorder's or clerk's office, looking for the chain of ownership, mortgages, liens, judgments, tax liens, easements, and other encumbrances. The search typically goes back at least 40 years to establish a clear, unbroken chain of title. The title company examines the deed of the current owner, the deed of the prior owner, and so on back through time, verifying that each transfer was properly executed and recorded.

The abstract of title is a written summary of all recorded documents in the chain of title. It lists each recorded document chronologically, including the type of document (deed, mortgage, release, lien), the grantor and grantee, the recording date, and other key information. The abstract shows the ownership history and identifies any liens or other encumbrances. It is used as the basis for the title insurance commitment and provides a record of the search process.

What Happens After

Title insurance is issued after the search is complete. There are two main types: owner's title insurance and lender's title insurance. Owner's title insurance protects the owner against losses from title defects that existed before the policy was issued but were not found in the title search. These defects might include forged deeds, missing heirs, adverse possession claims, or title defects from decades ago. Lender's title insurance protects the lender's mortgage interest and is required by lenders. The lender's policy is issued for the amount of the mortgage loan and decreases as the loan is paid down.

A title defect is any problem with the chain of title that prevents the owner from having clear, marketable title. Common defects include: an unrecorded deed or mortgage, a deed signed by someone who did not have authority, a judgment against a prior owner that was not satisfied, a misspelled name or incorrect legal description that breaks the chain, an easement or restriction that clouds the title, or a missing document in the chain. To cure a defect, the title company may obtain an affidavit from a party with knowledge (for example, that a debt was paid), may file a quiet title action to remove a claim, may obtain a release of a lien, or may extend the title insurance policy to cover the defect with an exception or waiver.

Title insurance is risk-based; insurers charge a one-time premium at closing and then cover title defects that arise during the period of ownership for the owner's policy (or during the life of the mortgage for the lender's policy). Title insurance does not cover defects that were known and disclosed before the policy was issued, nor does it cover violations of title exceptions (such as violations of recorded easements or restrictions).

Transfer of Property Rules by State

Each state has its own rules when it comes to transfer of property. Here are a few examples of how requirements differ: