Real Estate Title Insurance 101: What Home Buyers Need to Know

If you are working with a mortgage lender to fund the purchase of a new home, you may find that your lending institution will require you to purchase a title insurance policy.

New home buyers in particular are often unfamiliar with what title insurance entails and the type of protection that it offers. However, understanding the workings of title insurance is important before choosing a policy.

What is title insurance?

Simply put, title insurance is intended to protect home buyers and their lenders against any potential losses that could result from undiscovered defects to the property’s title that existed prior to the home sale’s closing.

These defects can include:

unsatisfied liens against the property such as the previous owner’s outstanding real estate taxes
any encumbrances on the property that can affect ownership such as errors with the deed
undiscovered errors or mistakes–both unintentional and intentional–in the property’s examining records
Such title defects can lead to unexpected costs or can even nullify the new home buyer’s ownership rights and the lender’s security interest regarding the property. Title insurance protects against these occurrences by providing coverage for any losses or legal fees resulting from such title defects.

What steps does a title insurance company take before issuing a policy?

Before agreeing to provide coverage for a home, title insurance companies will conduct their own due diligence on the property’s title. This can involve searching public records in order to document the full chain of ownership and expose any potential liens or encumbrances. If any such issues are uncovered, the title insurance company will often require that the home buyer eliminates the problems before a title policy can be issued.

What exactly does title insurance protect against?

It is important to note that title insurance policies will indemnify the home buyer and their lender against losses that arise from events which occurred prior to the closing date.

Any issues that arise after the home sale is closed will not be covered by title insurance; for this type of coverage, home owners will need a different type of insurance policy such as homeowners’ insurance. Title insurance policies usually require a single premium payment that is paid at the time of closing.

Who should purchase title insurance?

As noted, lenders almost always require home buyers to purchase a title insurance policy equal to the loan amount. In such cases, the title insurance policy is issued in the name of the lender. This type of policy provides protection for the lender for issues that are revealed after the covered property is financed. Even if a home buyer is not using a mortgage lender, however, title insurance is highly recommended. Through negotiation, some purchase agreements place the burden of purchasing title insurance on the seller.

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