If you’ve ever purchased a home, you’ve likely purchased title insurance. But do you know what title insurance is, or why you would need it? When you buy a home, you are given “title”– the owner’s right to possess and use the property. Title insurance protects you, the buyer, as well as the lender, against the possibility that the sellers (or previous sellers) do not have free and clear ownership of the property, and therefore the right to transfer the home. Title problems can surface after you close on your home and can affect your homeownership rights. Here are just a few examples of the hidden title problems that can surface:
- Errors or omissions in deeds
- Undisclosed mortgages, liens, or lawsuits
- Undisclosed easement and boundary issues
- Undisclosed heirs
How Title Insurance Works
When you buy title insurance for your property, the title company conducts an in-depth review of public records to make sure there are no problems with the title. Title searches can uncover title issues like liens, judgments, information on prior loans, assessment taxes, and other issues. The title company will then work to fix any defects that are found before the transaction closes. The title company will then issue an insurance policy that will help protect you from a variety of issues that might be uncovered later. Unlike homeowners insurance that is limited to future incidents, title insurance is limited to problems that already exist when the policy is issued. If you should happen to have problems related to the title of your home, your title insurance policy includes coverage for legal expenses that may be necessary to investigate, litigate, or settle a claim.
Two Types: Owner’s Policy and Loan Policy
There are two types of title insurance policies: a loan policy and an owner’s policy. If you take out a mortgage loan when you buy your property, your lender will require a loan policy of title insurance. This policy is typically based on the amount of your loan, and the policy amount decreases as you pay off the loan. It protects the lender’s interest in the property should there be a problem with the title. It does not protect the buyer. An owner’s policy protects the buyer if there is a title issue. This policy is issued for the amount of the real estate purchase. Even though you will pay for this policy only once (at closing), your coverage will last as long as you own your home. For many of us, a real estate purchase may be the largest financial investment we will ever make. Like many types of insurance, you may never need to use your owner’s policy, but the value of what you stand to lose is quite high. So, when you buy a title insurance owner's policy, think of it as buying peace of mind.