Title Insurance: Protecting Your Real Estate Investment
Buying a home is a significant financial investment. You want to do everything you reasonably can to protect this valuable asset. You buy homeowner's insurance to guard against damage or loss of property. Your home warranty covers repair or replacement of major systems and appliances. But what about losses from claims made against your ownership? Title insurance protects against these risks.
A title insurance policy insures against losses resulting from problems with the title that are not found during the title search but that are discovered after closing. These problems are also called "defects" or "clouds" on the title, and they can jeopardize your ownership rights in part or completely. Examples of defects include a claim to ownership by someone else or the cost of back property taxes. Perhaps the spouse of a previous owner from many years ago did not sign off for some reason when the property was sold. Or the title company somehow missed delinquent taxes when they completed their title search.
The title search looks for problems that would create a title defect. It is a thorough examination of all public records that pertain to the property you are buying. The person performing the search, usually a professional title examiner, reviews documents that extend back in time sometimes 40-60 years. The examiner looks at past wills, trusts, and deeds to make sure that all conveyances have been property conducted. He/she also checks to see if there are any financial encumbrances such as liens, judgments, and mortgages that have not been paid in full. The title search should also uncover any other potential issues like rights that others have to use a portion of the property -- easements, right of ways, etc.
Even the most diligent title search may not discover every problem. For instance there might be an error in the public records, a signature by an incompetent person, undisclosed heirs, or an unknown instance of fraud or forgery in the past. These and other issues can crop up at a future time to create title problems for you. That is why title insurance is important and needed.
Title insurance covers undiscovered problems -- defects like errors in public records and those that were missed by the title examiner or did not show up during the title search. It will pay for legal fees incurred if you have to defend your deed in court. And if the worse case scenario occurs and you lose your property, title insurance will pay for your loss up to the amount of the policy. The coverage is limited to defects that are already in existence when the policy is issued. It does not include future defects -- those that occur after you purchase the property. Some policies also exclude problems related to easements, boundary line disputes, and mineral and/or water rights. Be sure to ask what coverage exceptions are in your policy and discuss these items of concern with your attorney or escrow agent before you close.
What about cost and length of coverage? The cost of title insurance varies, but generally amounts to about one percent, or less, of the purchase price of the property. The premium is a one-time fee that is paid in full at closing. It is customary for the buyer to pay for title insurance, unless your state requires the seller to pay. Your owner's title insurance policy remains in effect at a minimum for as long as you or your heirs retain an interest in the property.
All in all, title insurance is relatively inexpensive and most would say well worth the investment. And remember, you need to have your own title insurance policy as an owner. Your lender will usually have a lender title insurance policy, but this policy only protects the lender's interests, not yours. Invest in your own and rest a little easier knowing that your property title is protected.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.