Title insurance is a policy that protects against financial loss stemming from problems found in a property's title, or legal ownership.
Think of it this way: As the buyer, how do you know the seller really owns the property? How can you be sure there are no liens, such as from unpaid taxes and lawsuits, or undisclosed heirs who might claim ownership? The answer lies in the title search.
A good title search generally turns up these types of issues. And a good title insurance policy will protect you should they arise during your ownership.
A real estate agent can answer your questions on title insurance and direct you to a title company. But at the same time, it's good to understand some of the basics.
Although you have the right to shop around for title insurance, most people follow the recommendation of their loan officer or real estate agent. One note: Because insurers generally follow the same pricing guidelines within each state, discounts can be elusive.
Two Types of Policies: Lender's and Owner's
There are two policies for title insurance – one protects the lender, and the other protects you, the homeowner.
Lender's title insurance
This insurance protects the lender, who technically owns the home until you pay off your mortgage. You'll pay a one-time premium at closing, which protects the lender for up to the full amount of the loan as long as you have the mortgage.
Owner's title insurance
This policy protects you. You're probably thinking: “I bought title insurance for the lender, and a search showed the property title was free and clear of any problems. Why do I need an owner's policy? It seems like a waste of money.”
The answer is that no title search is perfect. Without an owner's policy, someone could show up on your doorstep one day and say, "Hey, this is my house. The person who sold it to you never got the proper signatures from my now-dead relative, and according to his estate, I own this place."
Your owner's policy covers you for any losses in this case. Although a lender’s policy is required for closing, the owner’s policy is not – and you may not be asked if you want it. Speak to your agent about buying one during the escrow process.
You can always back out of the deal if issues come to light in the title report. Just be sure that there's a contingency written into the Purchase and Sale agreement to cover this.
Title Insurance FAQs
What time frame does title insurance cover?
It's important to understand that insurance covers the buyer and lender only for events that occurred before the purchase date. It does not cover future events, or any clouds or defects that arise after the purchase date.
In other words: If the buyer does something that causes a lien to be put on the house, the title policy will not cover the loss.
What kinds of claims are covered?
Standard policies differ by provider, but most cover:
• Undisclosed prior mortgages or liens
• Improperly recorded deeds
• Forgeries or impersonations
• Undisclosed easements or use restrictions
• Errors in legal paperwork
You will need to buy a new lender's policy if you refinance your mortgage. The lender will want to make sure no new claims have come up since you purchased the home.
What should I look for in the preliminary title report?
Generally, keep an eye out for the following:
Liens: A lien is a legal claim of ownership. Anyone the homeowner owes money to – such as unpaid contractors or tax authorities – can put a lien on the home. The most common type of lien is the one your lender will have on your home for as long as you have a mortgage.
Encroachments: An encroachment is something that crosses the neighboring property line. The best example would be a fence that has been placed improperly.
Easements: An easement is a legal right to use another person's land for a specific use. For example, you might have an easement to run your sewer line through part of your neighbor's property. An easement doesn't give right of possession; just the right of access.
Time is of the essence with your preliminary title report. Go over it with your agent immediately, as you have only a few days to address any concerns.
An easement isn't always cause for alarm, but if you discover one, be sure to investigate it with your agent.
How do I address problems that arise in the title report?
Your agent can help. Some issues, like easements, can be worked out, while others may be enough reason to walk away. The key is in understanding the issues and talking them through with your real estate agent.