Title insurance, simply put, protects you from any liens or owners of the property that were not present in a search when you bought the property, but actually have a legal right to the property. Title insurance is different from other insurance policies in that it is not a monthly payment; in fact, it is a one-time payment that protects your home for you, your kin, kin of kin, and so on.
A first time home buyer may not have had experience with a property title before. A title is an evidence that the owner of a property, well, actually owns it. (This is different than a deed, which are the documents that transfer the title from one person to another).
Just like health, life, rental, and car insurance, title insurance protects against loss, damage, or unexpected events. It’s paid in annual or monthly premiums.
It’s also much more than that. For instance, if a third party claims they have ownership of the property over you, the title insurance covers you in that situation. It also covers fraud, forgery, previously undisclosed heirs, and documents that were improperly recorded.
Another unfortunate circumstance could be a lien filed against the home. This means that someone has a legal claim to the proceeds from the sale of the property. This occurs when the previous owner was in serious debt to that person. Examples: taxes that haven’t been paid, contractor’s fees, and even individuals who were owed child support.
In the most extreme situation, the seller may be trying to sell you a property they don’t really own. This is why proof of title, and title insurance, is vital in any transaction.
When a home is financed, any events that affect the ownership of the property is recorded in public archives. When you buy title insurance, a title company looks through these records for any of the above issues. They look at wills and trusts, bankruptcy filings, tax records, and more. Even after all this, there’s always a chance of undisclosed or yet-to-be-discovered problems, which is why a policy is smart.
The policy is crucial because it lasts as long as you have ownership rights over the home. On the closing date, when the title is handed over, the title insurance comes into effect for the new owner.
There are two line items that go into title insurance:
- Owners Policy – As the name states, protects the owner of the property from encumbrances in the future.
- Lenders Policy – This protects the lenders and is usually paid by the buyer. This policy is only needed if the transaction involves a loan.
Learn more about what does title insurance covers?