Why Title Insurance? real estate services

These are some of the issues an owner’s title policy can protect you against:

• Property survey errors
• Boundary disputes
• Errors on the property deed
• Building code violations by a previous owner
• Conflicting wills
• Claims by an ex-spouse who didn’t sign off on the sale
• Forged documents
• Liens from contractors, taxing entities or previous lenders
• Encroachments
• Improperly recorded documents

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: 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.

When you’re in the process of buying a home, an abstract will be brought up to date and then sent to an attorney to check 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.

If the attorney 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 attorney, 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.  There is so many reasons that could happen and you as the Buyer would be responsible for the issue.

A title defect that arises after a loan closing could, at the very least, mean a variety of legal costs — and, in a worst-case event, the loss of your property and the money you’ve put in it.

Lenders insist on title insurance to protect their interest in the loan. And that makes sense, because they’re on the hook for the majority of the home’s value, especially in the early years of the mortgage.

Can you make a case against buying the owner’s title insurance policy? Sure. But let’s think this all the way through before making a decision.

“Here’s the deal: When you buy a house or build on a piece of property, usually you get a warranty deed,” “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. 

That said, title insurance doesn’t protect homeowners against all possible infringements on their property rights. For example, it doesn’t protect you against title problems caused by your own actions, such as failing to pay the company that replaced your roof or failing to pay your property taxes. It also doesn’t protect against eminent domain, which is when a government seizes private property for an ostensibly public purpose.

In short, it doesn’t protect against issues newly created after you buy the property. It protects against issues that might have affected your decision to purchase the property had you known about them at the time. So in other words from the time your deed is filed of record backwards not forward.