What is Title Insurance and Why Do You Need It?

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As you anxiously wait for closing day to arrive, you may be asked to obtain title insurance. Every lender requires borrowers to purchase title insurance- a policy that protects you and the lender from any outside claims of ownership of the property. It may sound crazy, but some random person could show up and claim they own your home! 

For example, a previous owner may not have paid all of their property taxes, and because those taxes remain against the property, the taxing entity could potentially take your home if you do not have a “clean” title. Title insurance can protect you from ownership claims over liens, fraudulent claims from previous owners, clerical problems in courthouse documents, or forged signatures.

How Does Title Insurance Work?

Obtaining title insurance is generally a two-step process. As a home buyer, you will have the ultimate decision on which title company to use. If you do not have one in mind, Michele Harmon Team will be happy to offer a few referrals! 

Once you have chosen a title company, they will perform a title search to ensure the property you want to purchase has a clear title. This confirms that the party selling the property truly owns it and has the right to sell it. If an issue arises, the title company will make you aware of it.

Upon completion of the search, your title company will assess any potential issues and offer a quote for a title insurance policy based on those risks. If a title has a significant amount of defects, the title company may decline to offer a policy.

Types of Title Insurance

Title insurance comes in two forms: a lender’s policy and an owner’s policy.

Lender’s Title Insurance: Lender’s title insurance is meant to protect your lender from liability, typically for the life of your mortgage, if any title defects arise. In most cases, your lender will require you to purchase this policy on their behalf. 

Owner’s Title Insurance: An owner’s title insurance policy will protect you. Although it is optional, it is recommended because it covers your interest in the property. If a situation arises in which your title insurance company loses a battle over the title, you will be fully protected and legal fees will be covered if you ever have to defend your ownership rights in court.  

What Does Title Insurance Cover?

Title insurance can protect you and your lender from having to fix defects with a property’s title, including:

• Liens from contractors who previously wroked on the home and were not properly paid
• Unpaid homeowner’s association dues or other outstanding debts
• A falsified or forged deed and other fraud-related issues
• Encroachments
• Disputes pertaining to ownership, such as an unknown heir

Ok, we know that was a lot of obscure Real Estate terminology. To further clarify, here are a few legal nightmare scenarios that title insurance can protect you and your lender from:

• You bought your house last year from a seller who inherited the property, and you later learn that the seller did not disclose that his step-brother was given half of the property, according to a documented will. In this scenario, title insurance will help you offset the legal costs of challenging his claims to your property.
• Yikes! You just discovered that your home’s previous owner had an overdue bill on a kitchen renovation.Now, there is a mechanic’s lien on the property from several years ago that predates your mortgage. Unfortunately, without title insurance, you are held liable as the current homeowner.
• Due to the mistake of a past surveyor, part of your property is inaccessible. Your property records are inaccurate and the value of your home is affected as a result. Without title insurance, you would not be compensated for your financial loss. 

The Bottom Line

Your home will be one of the largest single investments you make in your life. Even if the seller provides a warranty deed (a document that confirms the title is clear), an owner’s policy can help cover costs in the event of a title or ownership issue. For a one-time fee, your property rights will be covered for as long as you own your home. Your home is our business and Michele Harmon Team aims to be informative and helpful throughout the home buying process. Give us a call at 713-818-1330 for questions or more information on title insurance, closing day, or anything in between!