Buying a home is expensive, so it can be frustrating to discover near the end of the process that there’s yet another cost many people have never even heard of: title insurance.
Title Insurance: The Basics
Just what exactly is title insurance? It’s a type of insurance policy that protects an owner’s title, or ownership rights, to a property. In the simplest terms, it protects you and your lender financially if down the road you find out that something in the property’s past impacts your legal right to own the property. For instance, you might discover that ownership documents were forged; that there is a lien against the property; or unpaid debts on the property under a former owner. All of these things constitute title defects, and if you find out about them after a purchase, they can invalidate your ownership rights.
So, do I need title insurance?
The short answer: Yes (probably). There are two main types of title insurance: lender’s title insurance and owner’s title insurance. If you’re like the vast majority of people and are taking out a mortgage to buy a property, you are most likely required to buy lender’s title insurance, which protects the lender by covering the amount owed on the mortgage when the title defect is discovered. This way, the lender doesn’t lose out in the event of a title defect. But what about you–the person borrowing the money for the property? That’s where owner’s title insurance comes in: Owner’s title insurance would reimburse you for the mortgage payments already made on the property before your rights to own the property were called into question. It may also cover legal costs associated with defending any claims against your title and/or validating your claim to the property, as well potential losses resulting from a covered title defect. Note that an owner’s title insurance policy doesn’t just protect you–it also covers your heirs as long as either of you have an interest in the property.
OK, but what else?
When you buy title insurance, the title company performs a search to try to discover any problems with the title BEFORE you sign on the dotted line. As a result, title claims are relatively rare, though when they do happen, they can be devastating without the proper protection. Title insurance doesn’t just cover a house or other structure–it also covers any title issues with the land underneath the house, so it’s important even for new construction. Also, keep in mind that the price you’re quoted by the title company is a one-time fee, not an annual or monthly premium like other forms of insurance. You may also want to ask your agent about the benefits of an enhanced title policy. Enhanced benefits can include coverage for forced removal of structures; post-policy forgery, encroachment or damage from the extraction of minerals; building permit violations; or zoning ordinances that prevent you from using the property how you wish. Enhanced policies can also cover things like paying rent for substitute facilities needed as a result of a title problem and post-policy inflation coverage.