What is title insurance and why do I need it?

By RealtyCrunch IncApril, 20th 2020
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What is title insurance and why do I need it?

What is a title company?

A title company ensures that the title to a piece of real estate is legitimate and then issues title insurance for that specific property.

What is title insurance?

Title insurance protects the lender and/or owner against a home's defects or potential disputes between buyer and seller that could result in the lender suffering financial loss before the home sales transaction is completed.

2 main types of title insurance:

  1. Owners Title Insurance – protects the property owner from title issues
  2. Lender’s title insurance – protects the mortgage company

Home buyers will pay for the lender’s title insurance when you close on the home, but it's also a good idea to make sure you have an owner’s title insurance policy  (some parts of country sellers pay, in others, the buyers pays).

Why have Title Insurance?

Let's role play for a second... After you purchase a home, a person comes out of the woodwork and claims they are the rightful owner of a property. What would you do? Well thankfully, as a result of having title insurance, if the claim is valid, the title insurance policy will likely pay you the value of the home and the lender the amount they lent you to buy the home.

How does a Title determine that a Title is valid?

The title company will first conduct a title search which is an examination of property records to make sure that the person or company claiming to own the property does legally own it and there will be no claims against the ownership of the property.

It will also look at:

  1. outstanding mortgages
  2. liens
  3. judgments or unpaid taxes associated with the property
  4. restrictions
  5. easements
  6. leases or other issues that might impact ownership

Additionally, title companies can look at a property survey which determines the following:

  1. boundaries of the plot of land
  2. whether the home sits within those boundaries
  3. whether there are any encroachements on the property by neighbors
  4. easements that may impact ownership claim

Before the Title company issues it, they will prepare an abstract of title (short summary of what it found during the search) and then issue a title opinion letter (legal doc about the validity).

If the title is valid, the title company will likely issue a title insurance policy which protects the lender/owner.

This gives the buyer confidence that once he/she buys a property, he/she is the rightful owner of the property. And if there's an unforeseen event, the buyer will be fully protected.