What is Title Insurance?
Traditional insurance policies protect insureds against future losses. It protects insureds against claims for past occurrences.
Why is Title Insurance essential?
Title insurance is crucial for a property buyer because it protects you and the lender from the possibility that your seller doesn't or previous sellers didn't have free and clear ownership of the house and property and, therefore, can't rightfully transfer full ownership to you. Previous owners must have paid any real property taxes owed, reimbursed creditors, or settled outstanding legal obligations that may affect the asset in question. Heirs to the property can also potentially challenge its ownership.
An innocent party is not left alone to handle any unexpected challenges to an acquired property’s ownership. There would be an existing insurance policy set in place should there be any untoward incident that may arise due to defects to its title. Even though the chance of calling on the insurance for coverage is relatively low, the value on what you stand to lose if you go without coverage is high, you could, in fact, lose the property itself.
What is in a Title Insurance?
Title Insurance comes in two types: a lender’s policy and an owner’s policy.
A lender’s policy is a form of title insurance that a mortgagor of a property is normally required to take out for the protection of the lender. It guarantees that the lien on the mortgaged property is valid and enforceable, there is right of access to the property, and the title is owned by the borrower without liens or encumbrances.
An owner’s policy assures the new owner of insurance coverage for losses incurred due to defects on the property’s title. It protects against fraud, forgery, liens, encumbrances, and other defects.
What is covered?
Title insurers conduct an examination of the public records looking for matters affecting the title to the real property. These records can include, among other things:
- Civil and Probate court records
- Maintenance Agreements
- Restrictions on the property
- Debts and other burdens
Where to purchase?
The only time you can purchase insurance is at closing. Whether buyer, seller or both pay for the coverage varies according to local custom. In some areas, the seller buys the owner’s policy and the buyer pays for the lender’s policy. Both policies take effect on closing day. The Real Estate Settlement Procedures Act prohibits sellers from requiring you to buy coverage from a specific title insurer. However, if the seller is paying for it, the seller can use whichever company they want.
You can purchase title insurance from whichever company you choose. But the reality is that your lender probably has a preferred title company and it is much cheaper to piggyback your policy onto the lender’s. If you have a strong preference, you may be able to convince the lender to use the company you prefer. Costs are fairly similar from company to company in any region.
Title insurance coverage commences on settlement of a mortgage and lasts for the life of the mortgage, for a one-time premium payable at settlement.