What Is Title Insurance And Why Do You Need It?

Before you purchased your home, it likely went through several ownership changes, and each time the property changed hands, there should have been a record of what property rights were transferred. This is called the chain of title. Incredibly, more than a third of title searches reveal a title problem.

A good closing attorney can resolve the vast majority of the issues prior to closing. Some title issues cannot be foreseen because they are not located in public records. Hidden risks can include missing heirs, improperly recorded documents, encroachments, easements, liens, or taxes, and fraud (someone along the way may have forged a signature in transferring title). Title insurance steps in after the closing to protect against subsequent claims against the property stemming from these undiscovered issues.

There are two types of title insurance: the owner’s policy and the lender’s policy. The owner’s policy protects the owners of the property, while the lender’s policy protects the bank or mortgage holder.

Lender’s Insurance: This insurance is required by mortgage lenders for any real estate loans and lasts until the loan has been repaid. The required insurance protects the lender up to the amount of the mortgage in the event of a loss arising out of a defect in title. The cost of insurance is paid at the time of closing and the policy amount decreases each year as the loan is paid off.

Homeowner’s Insurance: Lender’s insurance does nothing to protect the buyer’s equity in the property.  If title is challenged, the buyer may end up stuck with attorney’s fees for defending the claim, or worse, lose the property. An owner’s title policy should be purchased for the full value of the home. In the event of a claim against the property, the title company will help defend the claim, and help pay valid claims.  Purchasing the policy usually entails a single upfront payment made at closing with coverage lasting through the end of the ownership interest in the property (direct ownership or through heirs).

The purchase of a home can be fraught with risks but owner’s title insurance can help provide greater peace of mind in the security of your investment.