Most homebuyers, especially first-time homebuyers don’t really understand why you need title insurance. As you go through a purchase process and figure out your down payment and other expenses, title insurance will be one of the costs incurred. But why do you need title insurance? Mortgage lenders require it for one, and for another, well, keep reading our blog to learn more.
Process begins with title search
Any time a buyer accepts a sales contract for a piece of property, a process begins. First, a title professional will do what’s called a title search. This involves examining public records going back many years. About one-third of these title searches uncover a problem. Some of these can include liens. For example, if a previous owner didn’t pay his or her property taxes, there may be a lien on the property you are purchasing. When an issue like this is discovered title professionals will try to resolve all these problems before the closing. Once the sale closes, the buyer receives the title, which states you have the right to possess and use the property purchased.
Dream home or Nightmare on Elm Street
In some cases, a problem does not come to light during a title search. Omissions in deeds, human error, forgery or undisclosed heirs can make purchasing your dream home, Nightmare on Elm Street. Fortunately, if something like this is discovered title insurance provides protection from these events.
There are two kinds of title insurance: an owner’s policy and a loan policy. An owner’s policy protects you, the buyer. It usually covers the amount of the real estate purchase. Insurance agencies charge a one-time fee at closing, and it lasts as long you or your heirs own the property. An owner’s policy provides assurance that your title company will pay valid claims and cover the cost of defending attacks on your title.
Aside from the owner’s policy, there is also lenders title insurance, though it is almost always referred to as a loan policy. Most lenders require a loan policy when they you give you a loan. It is based on the dollar amount of your loan. As explained earlier, it only protects the lender if problems with the title come up. The policy amount decreases every year and eventually disappears as the loan is paid off.
Problems that can appear after the closing and ruin your life
You might be thinking, “If I do a title search, why do I need insurance?” Even the most extensive title search can miss an issue. It’s not common, but it does happen. Here are some examples of problems that tend to appear after the title search and closing:
- The real estate crash of a few years ago sent countless homes into foreclosure. Many of those foreclosures were done hastily and are poorly documented. Technical flaws in such paperwork can invalidate a later purchase. This is something a title search may miss, but if were to occur, your title insurance would cover it.
- Mortgage fraud is another problem. The rising number of identity thieves has impacted real estate transactions. Scammers can and will steal homes on paper and then resell them to unsuspecting buyers. The duped buyers often don’t know they have bought something that was never for sale, until they meet the real owners, long after the sale has closed. Without title insurance, the would-be buyers would be left with nothing other than a fraudulent deed and an empty bank account.
- New construction may come with built-in bookcases and built-in risks. If the company that constructed your beautiful new house, never paid its bills, a lien could be placed on your property after closing. That means you, not the builder, face the creditors.
- Problems from the grave can haunt your title. And we’re not just saying that because Halloween is around the corner. Conflicting wills and missing heirs can haunt a property sale. If an heir, originally thought to be dead, shows up ready to claim his dear father’s birth home, you better hope you have title insurance.
Health insurance for your title?
If you are paying all cash for a property, then buying title insurance is optional. It is understandable to balk at paying this last burst of cash, but that may not be the right way to think about it. Buying a home is one of the biggest, if not the biggest investment you’ll make in life. Why let a few hundred dollars keep you from securing that investment. It’s like health insurance: you don’t need it until you need it and then you really need it.
At Landmark Title, our residential team of title and escrow officers has more than 40 years of experience assisting clients with their residential real estate transactions. If you have any questions or would like to use Landmark Title’s residential title and escrow services contact Jonie Alden firstname.lastname@example.org or call (602)748-2800.