What is Title Insurance? A Brief Explanation.
If you are like most people, you first became aware of Title Insurance during the home buying process and even then, were confused by what exactly it does. Perhaps some of the confusion lies in the fact that unlike car and homeowner’s insurance, that protect assests from potentially damaging future events, title insurance protects your property from events that occurred in the past. Simply put, Title Insurance protects against any unknown claims of ownership made on your home. There are two types of title insurance policies- owner’s and commercial lenders.
Owner’s Title Insurance
When you purchase a home or piece of land, you are given the property’s title. The title is a legal document that demonstrates your right to use and possess that property. Prior to closing, a title search is performed to determine if the title is “clear” (free of judgements, liens, taxes, etc. placed against previous owners) and if the person selling the property legally has the right to sell it. Depending on what is discovered during the search (via public and county records), the Title Insurance company will determine if any problems or limitations found with the property can be cleared up or insured at low risk. If a problem with a property’s title cannot be cleared, it can be listed as an exception under the Title Insurance company’s policy coverage. The insured party will be covered for any losses and legal fees the policy covers that might arise out of such problems.
Either the home seller or the home buyer may buy an owner’s policy- a one time charge paid at the time of closing. In many areas, sellers pay for owner title policies as part of their obligation in the transfer of title to the home buyer, the party paying can be negotiated during the purchasing process.
What about Lender’s Title Insurance?
If you are working with a commercial lender and were approved for a loan, they will typically require you to get Lender’s Title Insurance (loan policy). Lender’s Title Insurance protects your lender against a loss should a title problem arise after the property is financed. The insurance does not protect the buyer, it protects the amount of the loan to ensure it remains covered even if title changes hands. The lender’s insurance policy will remain in effect until the amount financed has been repaid, the property is resold, or until refinancing has occurred.
What if a property has a clear title search? Is title insurance still necessary?
Yes. While owner’s title insurance is optional, it protects against known– documented problems or property defects, and unknown defects– forgeries, frauds, recording/misfiling mistakes made across a property’s history. There are countless nightmares about homeowners who lost possesion of their home due to unknown liens or legal claims made after obtaining their property, enough to make the peace of mind of knowing your home is protected more than worth it.
If you would like additional information or have any questions regarding title insurance, contact me. I would love to hear from you!
Wikipedia: Title Insurance
Investopedia: Title Insurance
National Association of Insurance Commissioners: Title Insurance