Back HomeWhat is Title Insurance and Why do you need it?
One of the first questions I get when reviewing an Offer to Purchase or Real Estate contract with a Buyer is “ What is Title Insurance” and “Why do I need it?” These are great questions and ones every savvy (or even bewildered) home buyer should be asking.
Title insurance is normally purchased at the same time as you buy your home. Unlike other types of insurance, your title insurance policy, for a one-time premium paid at closing, provides protection to you and your heirs for as long as you own your house. Also unlike other types of insurance, title insurance protects you from events that happened in the past: a forgery, forgotten heir, hidden mortgage or tax liens or other claims by people or entities who may truly (but unbeknownst to you) have a right to your property.
If you get a mortgage as part of your purchase, chances are the lender will insist that you get title insurance, indeed a special form that specifically protects the lender. Technically, you don’t need title insurance any more than you need homeowner’s insurance to offer peace of mind against a fire loss. But this unique form of protection insures that you actually own your property, free and clear of impediments and, as a consequence, it is worthwhile.5
Many Buyers think that title insurance is something they can choose to fore go. After all, the title company did a search of the property already. Why not just review the commitment and forgo the policy? It is a common misconception that a title search will uncover every possible defect in title. Title searches only discover events and documents of public record, so anything done illegally or without proper documentation may not be known until some time in the future.
Remember, even the most thorough title search is prone to human error. And even if the title company or your closing attorney has done their job perfectly, there may have been an error in recording or at some other step in any previous transaction including the property.
Lenders do not consider title insurance optional. In fact, nearly all institutional lenders insist on having their own policy separate from the owner’s policy. If it’s important for their partial investment in the property, it is even more important for the homeowner to be protected for the full value of the home. The lender’s policy protects the lender for the amount of the loan, and for the validity and position of their lien. Only an
Owner’s policy fully protects the buyer against title problems that arise after the home is purchased.
There are potentially hundreds of ways title to your property can be compromised. Even if you don’t lose your property altogether, certain title defects can make it impossible for you to sell or even give away your property. Here are some, but no way all, of the possible title defects covered by title insurance:
- Forged deeds, releases, or wills.
- False impersonation of the true owner of a property.
- Documents executed under invalid or expired powers of attorney.
- Misinterpretations of wills, or discovery of a later will after the first will goes through probate.
- Mistakes in recording deeds
- Undisclosed divorce by someone who conveys title of a deceased former spouse.
- Claims resulting from the use of aliases or fictitious names by someone earlier in the chain of title.
- Liens for unpaid estate, inheritance, income, or gift taxes.
- Disputed or fraudulently obtained release of a mortgage document.
- A misapplied tax payment.
- Undisclosed heirs who surface years or decades later.
The party responsible for paying for the two policies — buyer’s and lender’s — varies from state to state and sometimes from county to county. In some locales, the buyer may pay for one; the seller, the other. If you’re buying the owner’s and lender’s policies from the same company, “in many cases, there’s a substantial discount.
If you pay for the title insurance, you have the right to select the company. If you’re not paying but want to choose the company, be prepared to share some of the costs.
Be wary if the seller is pushing his title company. A title search is meant to find errors before you buy. Use the same company that your seller did years earlier and odds are you’ll get the same results. Often, searchers aren’t using actual records but summaries or extracts of those records. A fresh set of eyes (and extracts) could unearth problems, allowing you to fix them before you buy. I always recommend that my Buyers retain their own real estate attorney to review Title and survey and state exceptions and clear any known defects.
If you’re getting advice from your seller, you’re a real estate agent that is not an Exclusive Buyer Agent and your mortgage lender, look to the lender. The lender’s interest dovetails with yours in getting these things done thoroughly and correctly. The lender is guaranteeing a large amount of money based on the assurance that the property you’re using as collateral is really yours.
If you want to verify that the underwriter issuing the insurance policy is currently sound, check its financial solvency with ratings companies like Fitch Ratings, Demotech Inc. or A.M. Best Co.
Once the closing takes place, the title company records the documents and issues the final title policy, which you should keep in a safe place with other legal documents.
Should a title problem arise at any future date, the title company will stand behind the policy holder, both monetarily and with legal defense if necessary, to pay claims and defend their title to the property.
Kim N. Bregman