Most new homeowners are prepared to buy insurance to protect their new investment from future damage. Minimally you will need fire insurance, and you may also need flood insurance. There is a type of coverage that protects you from problems or mistakes that happened before you bought the property. It is called title insurance. You may know that title insurance is part of the closing costs, but not really know why you are buying it. In this article, we explain what title insurance is and why you need it.
Clear Title
It’s the title company’s job to properly research the property. Who has owned it in the past and whether liens or claims against the property still exist. They also ensure that there is a legal chain of ownership. This means that each time the property was transferred, it was done so legally. If they discover any problems, the seller must clear up those issues before the sale can proceed. The title company is ensuring that you are buying a property with a clear title – one with no defects.
Why It Matters
Once you take title of a property, you are responsible for it. For example, if there is an undiscovered mechanic’s lien on the property for unpaid work completed by a vendor for a former owner, you will need to pay the vendor. Title insurance will protect you against this claim.
Two Policy Holders
If you take out a mortgage to buy your home, your lender will require a lender’s title insurance policy. This protects their interest in the property – not yours. You will need to purchase a separate owner’s title insurance policy to protect you from defects that impact your interest. In some cases, defects are discovered when you are trying to sell the property. This could cause the buyer to back out of the deal.
Types of Defects
There are several types of defects the title company will correct, including:
•Fraud or forgery: If the signature on a document is forged or acquired through fraud, another party (such as an heir or previous owner) can question your legal right to the property.
•Clerical errors: A deed or survey of the property may have clerical errors or been filed incorrectly. For example, a seller may claim their condominium has a deeded parking space, but it is not showing up on the latest deed. The title company can investigate if it was accidently dropped off the deed during a previous transfer.
•An illegal deed: Certain people cannot legally obtain a deed to a property like a minor or undocumented immigrant. Again, this may impact your right to legally own the property.
•Unknown liens: If a previous owner had work done on the property, but did not pay for it, the contractor may have placed a lien on the property. If this is discovered after closing, the title company will handle it and pay to release the lien.
Who Pays for Title Insurance?
Unlike homeowner’s insurance, you will pay for title insurance one time – at closing. It covers defects that took place before you took title to the property. It covers the property until you or your heirs sell it. You will pay for the lender’s policy if you are taking out a mortgage. The owner’s policy is negotiable. An experienced real estate agent can help you determine if you should include this in the offer.
Who Chooses the Title Insurance Company?
The seller will typically select the title insurance company. Although the terms title and escrow are used interchangeably, they are not the same thing. The escrow company is a neutral third party who holds the funds and handles the closing. You can purchase title insurance from a different company than the one who is handling escrow. You do want to make sure that the title insurance policy is from a reputable company. You could own the properties for decades and want to select a company that is likely to still be in business should a claim arise.
You May Need Additional Coverage
There are many different types of title defects that can come back to haunt you in the future. Examples include zoning or right-of-way issues. The basic owner’s title insurance policy may not be sufficient. An experienced real estate agent and a reputable title insurance company can help you determine if you should add any riders to the basic coverage.
Protect Your Investment It may be tempting to forgo the expense of an owner’s title insurance policy. But like most insurance, you buy it in the hope that you will never need it. Buying a home is a major financial commitment. Protect it from fires, natural disasters – and title defects. You will sleep better knowing your investment is protected.
It’s Personal
Buying your home is a critical life decision for most people. I believe in the unique, personal nature of real estate. I will carefully guide you through the process of buying your home – or any other real estate investment. Feel free to contact me anytime, whether it is to get started on helping you realize your goals and dreams, or just to ask a question. I would welcome the opportunity to make a difference for you. Please email me at pthessen1@gmail.com or call 270-796-7550.
-by Perry Thessen
