Is it like home owners insurance?
When you buy a home, there's a lot of paperwork involved. You're taking out a mortgage, contracting with a home inspector, working with a real estate attorney, and signing up for insurance—all at the same time.
In the midst of all of this, it's important to understand what you're signing up and paying for, particularly in the realm of insurance. You'll take out a homeowners insurance policy, and you probably have a pretty good idea of what that policy covers. But what about title insurance? Why is title insurance required, and how does it differ from homeowners insurance? Take a look.
Title Insurance vs. Homeowners Insurance
As a quick review, homeowners insurance is meant to insure your actual, physical property against risks. If a natural disaster like a snowstorm damages your home, then the homeowners insurance policy covers it. Homeowners insurance also protects you from liability if someone is injured on your property. For example, if someone trips on your stairs and breaks their leg, your homeowners insurance will cover their medical bills.
Title insurance doesn't protect your physical property—it protects your ownership of that property. Before you buy the home, a title company will do a title search. This search will determine if anyone else has a claim or lien on the property. If the title comes up "clear," or in other words, free from all claims or liens against the title, then you can purchase it. Title insurance will be issued to protect you should someone come forward, at a later date, claiming ownership of all or part of the property.
Two Types of Title Insurance Policies
So far, this article has focused on title insurance that is issued to the buyer, since that's the type of policy you are issued when you buy a home. But here's another difference between title insurance and homeowners insurance: There are actually two types of title insurance policies.
The first is called an owner's policy; that's the type of policy that, as discussed above, protects your ownership of the property.
The second is called a lender's policy. This insurance is issued to the bank or credit union that holds your mortgage. It protects the lender if someone else should, in the future, come forward with a claim or lien against the property.
Do You Need Title Insurance and Homeowners Insurance?
The short answer to this question is "yes." You do need both types of policies. Homeowners insurance is required if you have a mortgage on the house, and even if you don't have a mortgage, it is a very affordable way to reduce your risk and protect yourself from litigation.
Title insurance is also important because although it's rare for liens and claims to a title to show up after a title search, it can be devastating when they do. Errors in the public record, heirs that were omitted from wills, and undiscovered liens can result in claims against your title insurance. If it were not for title insurance, these liens and claims could mean you lose your home or owe hundreds of thousands of dollars.
Thankfully, you only have to pay for title insurance once, when you buy the home, whereas you'll make monthly homeowners insurance payments. Both, however, are important to protect your home.
Living in your very own home should feel safe and enjoyable. Title insurance is just one of the small things that can help give you that true safety and peace of mind.