Title insurance can be one of those things that someone says you need when you buy a home, but you dont understand why.
Without it, you could be left with a nagging question in the back of your mind: “Does the seller really own the property?” If the answer is no, it could be bad if you dont have title insurance.
Some people or companies other than the title owner may have rights to the property. For example, the property owner may have sold mineral, air or utility rights to someone else. Or a bank with a mortgage on the property may own an interest in it. The government can also have a lien on the property for unpaid taxes.
What does title insurance do, exactly? Basically, it covers events related to the title that have already happened. It doesnt cover future things that happen to the title after it has been issued.
First, the title company or an attorney verifies that the seller owns the property and is free to sell it. The title search includes searching property records to make sure there havent been any clerical errors and that there arent any undisclosed heirs, spousal claims, omissions in deeds, unknown liens or fraud with the deed. If there are any errors, theyre fixed before the home purchase transaction is completed.
Second, the title company contracts an underwriting company to issue an insurance policy, called title insurance. This protects you in court if anyone challenges you to the title of your home. If you lose any equity, youll be compensated.
Two insurance policies will often have to be bought by the homeowner: one protecting them as the owner, and a lenders policy protecting the lender. The lender requires the insurance because it is providing a loan with the property as security. A problem with the title affects the value of the lenders security. Only the amount of the loan will be covered in the lenders policy, and it will decrease as the homeowner pays back the loan.
Published with permission from RISMedia.