Title insurance protects the insured from a financial loss related to the ownership of a property. There are two policies in the mix at a home loan closing papers: the lender’s policy, which is required, and an optional owner’s policy. Both are a one-time, upfront cost — not a monthly premium that will be added to your mortgage payment.
“Title insurance protects the insured from a financial loss related to the ownership of a property.”
When you’re in the process of buying a home, a title research company will check the property’s ownership history. Ideally, your new home has what’s called a “clear title.” That means the current owner, who is selling to you, has a complete ownership stake in the property, without any legal claims against it. Claims can be in the form of a lien or levy from a lender, creditor or — in the event of taxes due — the government.
When you purchase title insurance, a title company runs a deep search through these and other records to detect any issues with the ownership of the property. It may also look at deed, tax and court records to verify ownership history. Typically, you pay a one-time premium for this service at closing. Your policy is good for as long as you or your heirs own the home. If you have an issue with the home before or after closing, your policy covers you against any losses.
If the research company doesn’t find any outstanding claims or title defects, why buy title insurance? Because an as-yet-undiscovered issue could cloud the ownership of the property years after the purchase. That could be a mistake in the ownership history, an oversight committed by the title researcher, even a previously unknown heir. Maybe there’s a pending lawsuit or legal judgment. A title issue could also arise as a matter of fraud.
When you buy a house or build a property, usually you get a warranty deed,” says Martin Farris, a mortgage broker in San Angelo, Texas. “That means the seller is saying, ‘This is a good deed. I own this property free and clear. I’m transferring it to you free of any other liens.’”
So, any ownership defect would be the seller’s responsibility, right? And as a buyer, you’re in the clear — any legal action would be against the seller. But remember, the seller has transferred that risk to the insurance company. And even though the lender is protected by the title policy, your stake in the home could be at risk. That would be equal to your down payment and any equity you have. Again, a title claim could happen many years after your purchase.
For many home buyers, purchasing an owner’s title insurance policy is a matter of being safe rather than sorry.
References:
Bundrick, H. (September 18, 2017). Title Insurance: What It Is and Why You (Probably) Need It. Retrieved from: https://www.nerdwallet.com/blog/mortgages/what-is-title-insurance-do-you-need-it/
Lake, R. (April 26, 2019). Retrieved from: https://smartasset.com/mortgage/buying-a-home-do-you-need-title-insurance