Understanding Title Insurance
Title insurance is a policy designed to protect lenders and homebuyers against financial loss from problems with the ownership of a property. It's important to note that the policy you're required to purchase during closing protects the lender and not you. To ensure you're protected from any title issues that arise after closing, you'll have to buy owner's title insurance.
Many buyers hesitate to purchase title insurance because it seems like just another added expense to the already expensive home buying process. However, it's a one-time premium designed to protect you in case the previous owner was not legally able to transfer the ownership rights. Without title insurance, you actually stand a chance to lose your home, or you may be forced to pay a title claim settlement out of pocket.
Let’s dive deeper into the two types of title insurance and see how you can protect the title rights to your home.
Types of Title Insurance
There are two types of title insurance:
- Lender’s Title Insurance
- Owner’s Title Insurance.
At closing, your lender will require you to purchase a lender’s title insurance policy on their behalf to protect their interests against any title problems that may arise. It’s an insurance policy valid for the life of the loan and is mandatory to get a mortgage loan. Lender’s title insurance only covers claims that affect the lender’s loan and have no bearing on your equity, which means you’ll be held responsible if someone files a lawsuit against your home.
On the flip side, an owner’s title insurance policy is designed to protect you, the homebuyer. Since title searches are not infallible, you remain at risk of significant financial loss. Owner's title insurance insulates you against any defects in the title. An owner's policy isn't mandatory, but you're free to purchase it of your own volition.
Risks of Not Having Title Insurance
A title claim could arise at any time, even after years of faithfully paying for your mortgage. To offset the risk of title claims, your mortgage lender will order a title search that will go through public records to find any title defects that could affect your property rights as well as theirs. A title search will typically cover the following hazards:
Ownership by another party.
Liens for unpaid monies placed on the property for a contractor, tax authority, or lender. Without owner’s title insurance, you might end up having to pay a previous owner’s unpaid bills if a claim was made after closing.
Easements that allow third-party access to your property and limit your ability to access or use it however you want.
- Encumbrances or judgments against the property, including outstanding lawsuits and liens.
An extensive title search covers everything from deeds, court judgments, and tax records to child support orders and divorce decrees. Nevertheless, a title search may fail to reveal all the outstanding claims against the property. Even sellers sometimes aren't aware that someone else has a claim on their property. An overlooked heir could show up out of the woodworks, or the seller may have inherited the house under the terms of an outdated will. Maybe the previous owner bought the house from someone whose ex-spouse didn't sign off on the sale, or there could be fraud or forgery of previous paperwork.
Without title insurance, the financial burdens of such claims rest solely with you, the buyer. An owner’s title insurance policy protects your interests in the property for as long as you have them.
If you're hesitant to purchase owner's title insurance, consider this: the lender has taken steps to protect their investment in the property; why shouldn't you? In case a valid claim arises, the lender’s policy will kick in to defend their claims and reimburse them for what you still owe on the mortgage – in case the court rules that someone else is the rightful owner of the property.
You, on the other hand, will lose all the equity you've built, and you'll no longer own the house. Same case, if they're any outstanding liens on the property, you'll either pay them or risk losing the home to the claiming body. That's why purchasing title insurance is so important.