What is it and why do I need it?
When you buy a piece of real estate, you are given a title. That title gives you the official rights to ownership of that property, allowing you to make modifications to it, and use it in any way that local zoning ordinances and state laws permit. What you may not realize is that the title to your property should be protected by insurance. No, we're not talking about homeowners insurance, although that is also essential. We're talking about title insurance, which is a different kind of insurance, entirely.
What Is Title Insurance?
To put it simply, title insurance is a type of insurance that protects you (the owner of the property) and the lender (the mortgage holder) against any unforeseen issues with the title. You can buy a policy that protects the lender, only, which is quite common. You can also buy a policy that protects the owner only.
So, what kinds of unforeseen title issues does this insurance protect against? Mostly, these are things that might have happened in the past. A common example is liens that may have been placed on the property in the past. If a lien is discovered, title insurance will cover any associated costs to pay off the lien. If it is discovered that the property has a prior owner who was not known about, the costs of getting that owner off the title will be covered. Judgments against the property, defective records, unpaid taxes, unrecorded easements, and incorrect signatures on documents are also protected against by a title insurance policy.
Why Is Title Insurance Important?
At this point, if you are at all familiar with the real estate purchasing process, you might be wondering why title insurance is so important since a title search is done as a part of each sale. Wouldn't issues like liens and defective records be discovered in a title search? Well, sometimes they are, but sometimes they are not.
Title searches, especially those on residential property, often only go back one or two owners. Likely, the property has a longer history of ownership than that. Title insurance ensures you don't have to deal with any problems associated with sales and ownership that were overlooked in the title search or that happened longer ago than the reach of the title search.
Consider, for example, if you were to buy a property and later find out that a previous owner owed $20,000 worth of property taxes. Without title insurance, you would owe those taxes. However, if you had a title insurance policy, the title insurance would pay those back taxes.
How Do You Buy Title Insurance?
The good news is that title insurance is a one-time purchase. Usually, the buyer is responsible for paying for title insurance to protect their lender. Title insurance to protect the buyer is often purchased by the seller as a part of negotiations, but you can certainly buy a policy to protect yourself as a buyer, too.
Your financier or escrow agent can recommend a title insurance company. The cost will be paid at closing as a one-time premium. You can expect to pay anywhere from $500 to $1,500 for a policy, although rates vary by region and according to the value of the home.
Title insurance is essential to protect the lender when you're purchasing a home. It's also a good idea to buy an owner's policy if you have any reason to suspect there may be past liens, back taxes, or other conflicts on the title. Like all insurance, title insurance exists to reduce your financial risk.
