Title Insurance: Do I Need It?

When you purchase a home, your lender charges you for a title insurance policy. You are also given the option to buy your own title insurance policy. Depending on your agreement with the seller, the seller might purchase the buyer’s title insurance policy. Before a seller can sell his or her property, it must have clear title. However, the title searchers could miss something. Title insurance protects the buyer and the mortgage company against financial problems that might come with a “dirty” title.

What Is a Title Search?

A title search looks at public records to determine the legal ownership of a property. The title search should uncover any liens against the property in addition to easements and other problems with the title. Building code violations, unpaid taxes and erroneous surveys are just some of the items that cause a title to be “dirty.” If a title has issues, the seller must rectify those issues before they are allowed to close on the deal.

What Is Title Insurance?

The title insurance protects the holder of the policy from any defects in the title. When you think of insurance, you generally think of being insured against things that will happen in the future. Title insurance protects you against things that happened to the title in the past. The insurance policy usually covers fraud concerning title documents, forgery on title documents, ownership by someone else, incorrect signatures, flawed record-keeping, flawed records, terms that reduce enjoyment (such as unrecorded easements) and encumbrances (such as liens and outstanding lawsuits).

The Cost and Types of Title Insurance

The cost depends on the title insurance company, but is usually around 1 percent of the purchase price of the property. The types of title insurance are owner’s insurance and lender’s insurance. As previously mentioned, the buyer buys the policy for the lender. The buyer or seller purchases the owner’s (buyer’s) policy.

The lender’s policy does not protect the buyer from loss – it protects only the lender. If you want to be covered against losses, you should always purchase your own policy if the seller doesn’t do it for you. Never rely on a title search, as it is easy enough to miss something that clouds the title.

For example, if the title search does not show that the seller has unpaid taxes and the closing goes through, the buyer is now responsible for those unpaid taxes. A title insurance policy protects the buyer against situations such as this.

If you are purchasing a home that was in foreclosure, the title is more likely to have issues because the sellers might not have more liens against the property in addition to the foreclosure. For example, if a seller does not pay a $20,000 hospital bill, the hospital could place a lien on the property. If the title search does not find that lien because someone erred in recording it, the buyer is responsible for that hospital bill once they close on the property. It is recommended that you always buy your own title insurance policy, whether you or the seller pays for it.