Title Insurance Explained

Dated: January 11 2019

Views: 191

On most home purchase contracts, there is a section about title insurance.  You and your agent probably fill in who will pay for the title insurance, but do you actually know what title insurance is?  If not, stay tuned.  In this blog, I will explain all of the details about title insurance.

Before we begin, here are two key terms that will be used repeatedly in this blog.

  • Title: refers to the rights of ownership with regards to a piece of real property (Source: www.legalmatch.com)
  • Chain of title: the sequence of historical transfers of title to a property (Source: www.legalmatch.com)

Title Insurance is a comprehensive insurance policy in which the policy owner is insured against losses arising through defects in the title to real estate. This sounds like most other forms of insurance (health insurance, life insurance, etc.), but there is one main difference … title insurance insures the policy holder against defects in the title that have already happened, such as a forged deed somewhere in the chain of title.  Another difference between title insurance and other types of insurance is that title insurance is paid for as a one-time payment as closing. There are no monthly premiums that homeowners pay to maintain their title insurance policy.

Why would a title company provide insurance against defects that have already happened?  During the home purchase process, the title company performs a title search on the property.  During the title search, the title company will look through all public records and all material facts of the property and based on the results of their investigation they will determine if the property is an insurable title.  Stating that the property has an insurable title, is the title company stating that they have not found any material defects in the title, and only at this determination will the title company issue the title insurance policy.

As we all know, sometimes mistakes happen, and public records aren’t readily available, which is where the title insurance policy comes in.  Title insurance protects the insured loss due to against unforeseen title defects.  As a title insurance policy holder, the title company agrees to cover the policy holder’s attorney fees and court fees, or pay financial loss caused by unknown defects.

Let’s discuss an example caused by unknown defects to title.  Say a man died with a Will and he left the home to his nephew, JonSmith.  When the Executor of the Will reaches out to the beneficiary, he reaches out to John Smith.  A month later, John Smith decides he wants to sell the house, and you buy it from John Smith.  As an informed buyer, you get a title insurance policy before closing.  You have been living in your new home and enjoying it for the past 3 years, and all of a sudden Jon Smith, the rightful heir of the home, comes to you and demands that you give him his home.  What do you do now? You could try to find John Smith and ask for your money back, but the likelihood of that is slim.  This is where the title insurance policy comes in. With the title insurance policy, you will be protected against the financial loss of having to give up the home to the rightful heir (or paying Jon for the home if you want to stay), since there was a defect in the title, and John Smith should not have been allowed to sell the home to you.

If you purchase a home with a mortgage, your lender will almost always require a lender’s title insurance policy.  This will protect the lender and ensure they get all of their loaned money back, in the case of a title defect. The owner’s title insurance policy is optional, but I always recommend that my clients get this policy, so you are protected from cases like the example above. Depending on your state, it may be customary for the seller to pay for the owner’s title insurance policy for you. Work with your real estate agent to determine what is normal for your state and negotiate who pays for the title insurance policy for your home purchase.  Like all insurance policies, it is important that you read your title insurance policy, so that you understand what is covered and what is not covered.

Do you have more questions on title insurance? Feel free to email me or comment below. I’m happy to help!

Disclaimer: This blog is not intended to provide legal advice. Always consult your attorney for legal questions.

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Brittany Hill

It's not about me, it's about YOU!....

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