Test Your Knowledge: Title Searches and FHA Home Purchases

How much do you really know about the home buying process?

One major factor in protecting your new investment is knowing how the title search process works and why you need to have one done.

This quiz will assess your comprehension of what a title search entails, why it's so important when using an FHA loan, and how it protects you as a buyer.  From identifying potential liens to guaranteeing clear ownership, a title search plays a critical role.

1. What is a title search?

a) A physical inspection of the property's boundaries.
b) An examination of public records to determine legal ownership and uncover any claims against the property.
c) An appraisal of the property's market value.
d) A review of the seller's financial history.

Answer: b) A title search is a comprehensive examination of public records to verify legal ownership and identify any potential issues that could affect the buyer's rights to the property.

2. Why is a title search particularly important for FHA-backed home purchases?
a) The FHA requires it to protect its investment in the mortgage.
b) FHA loans have stricter appraisal requirements.
c) FHA borrowers typically have lower credit scores.

Answer: a) The FHA, as the insurer of the mortgage, mandates a title search to ensure the loan is secured by a property with a clear and marketable title. This protects the FHA's financial interests.

3. Which of the following can a title search reveal?

a) Unpaid mortgages on the property.
b) Disputes with neighboring properties.
c) Easements granting access to utility companies.
d) All of the above.

Answer: d) A title search can uncover various issues, including liens (like unpaid mortgages), legal disputes affecting the property, and encumbrances like easements that restrict property use.

4. What is a lien?
a) A restriction on how the property can be used.
b) A financial claim against the property, such as an unpaid debt.
c) A right of access across the property.
d) A document proving ownership of the property.

Answer: b) A lien is a financial claim against a property, often due to an unpaid debt. Examples include mortgage liens, tax liens, and mechanics' liens.

5. How does a title search protect the buyer?

a) It guarantees the property's value will increase.
b) It ensures the seller has the legal right to sell the property.
c) It eliminates the need for homeowners insurance.
d) It automatically reduces the interest rate on the mortgage.

Answer: b) A title search verifies the seller's legal ownership and right to transfer the property, protecting the buyer from potential ownership disputes or fraudulent sales.

6. What is an encumbrance?

a) A type of home insurance policy.
b) A restriction or limitation on the property's use, like an easement.
c) A type of mortgage.
d) A legal document transferring ownership.

Answer: b) An encumbrance is a restriction or limitation affecting the property's use. Easements, covenants, and other agreements that limit how the property can be used are examples of encumbrances.

7. What is the purpose of title insurance?
a) To protect the buyer against financial losses due to undiscovered title defects.
b) To cover the cost of repairs to the property.
c) To insure the buyer's personal belongings within the home.
d) To guarantee the seller's promises about the property's condition.

Answer: a) Title insurance protects the buyer from financial losses if title defects, like forged documents or undisclosed liens, are discovered after the closing.

8. Who typically conducts the title search?

a) The buyer's real estate agent.
b) The seller's attorney.
c) A title company or real estate attorney.
d) The FHA appraiser.

Answer: c) Title companies or real estate attorneys specialize in conducting title searches and issuing title insurance.

9. What is a title commitment?

a) A preliminary report outlining the findings of the title search.
b) The final legal document transferring ownership of the property.
c) A type of mortgage pre-approval.
d) A contract for home repairs.

Answer: a) A title commitment, also sometimes called a preliminary title report, summarizes the findings of the title search, outlining the current ownership, any liens, encumbrances, and other relevant information.

10. What happens if a title defect is discovered during the search?

a) The buyer is automatically responsible for fixing it.
b) The seller is typically responsible for resolving the issue before closing.
c) The deal is automatically canceled.
d) The title insurance company immediately pays the buyer.

Answer: b) Generally, the seller is responsible for clearing any title defects before the real estate transaction can be finalized.

11. True or False: A title search is only necessary for older homes.

Answer: False. Title searches are crucial for all home purchases, regardless of the age of the property. Title defects can exist even in newly constructed homes.

12. True or False: A clear title is important for future transactions if the buyer decides to sell the property.

Answer: True. A clear title is essential for marketability. If title issues are discovered during a later sale, it can create delays and complications for the seller.