WHAT IS TITLE INSURANCE? DO YOU NEED IT?
What is title insurance, other than words that sound expensive? Here is how title insurance works, how to decide whether to purchase a policy, and the costs you can expect to pay.
What is title insurance?
Title insurance is protection from a financial loss related to ownership of real property. The types of policies vary, but two main policies are in the mix in a real property closing: the lender’s policy, which is required by the lender and an optional owner’s title policy. Both types of policies cost a one-time, upfront fee versus a monthly premium like you see for homeowner’s insurance.
When you are in the process of buying a home, a title research company will check the real property records and obtain a history of recorded documents for that property. Ideally, the search will show that the current owner, who is selling to you, has a complete ownership stake in the property, without any legal claims against it, such as liens or levies by creditors, including taxes due to the government.
Do you need to buy title insurance if the research company does not find any outstanding claims or title defects? The answer is yes, because an 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 researcher or an unknown interest asserted after closing. A pending lawsuit or legal judgment also could affect the property that the research company could not find at the time of the search. Fraud in the title records also may cloud your legal interest. Therefore, a title defect may arise after closing on your new house, and could, at the very least, mean a variety of legal fees and costs — and, in a worst-case event, the loss of your property and the money you have put in it.
Lenders insist on title insurance to protect their interests in the loans since the properties are the main source of security to ensure repayment.
Do you need owner’s title insurance?
Can you make a case against buying the owner’s title insurance policy? Of course. In theory, any ownership defect would be the seller’s responsibility, rignt? As a buyer, you think you could merely file a legal action against the seller. Unfortunately, the seller may be long gone, and the one of the largest purchases in your life may be unprotected. 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 acquired. Again, a title claim could happen many years after your purchase.
Rather than spending thousands of dollars defending your title interests, the one time purchase of title insurance provides security like any insurance product, provided that you comply with all of the terms and conditions.
Do you have to pay for title insurance, or can you shift that costs onto the seller?
You may be able to negotiate with the seller and request the seller to pay for both policies, or pay for the cost of the owners policy. The cost of the one time premium could save you thousands of dollars if an ugly title issue presents itself.