Purchasing a house is a momentous occasion and likely one of the biggest purchases you’ll ever make. Such an investment requires proper protection, especially considering it’s the very place you and your family call home. One way to protect your property with title insurance. Here are seven reasons why title insurance is vital for homeowners’ financial security.
WHAT IS TITLE INSURANCE?
First, let’s review what title insurance does. A title is the evidence of ownership and possession of property, which stands against the right of anyone else to claim it. Title insurance is a means of protection against financial loss, should any title defects or third-party claims arise from your title.
There are two types of title insurance policies:
1. An owner's title insurance policy is a policy of indemnity and protects the homebuyer’s property rights against covered claims that may surface after purchase. While not required, it is always in your best interest to purchase an owner’s title insurance policy.
2. A loan policy (or lender’s policy) insures the financial investment of the lender or bank, and is typically required to get a mortgage loan.
REASONS TO PURCHASE TITLE INSURANCE
1. A THOROUGH TITLE SEARCH
Before you commit to buying or refinancing property, a title examiner will examine title plants or public record databases to determine ownership of the property and to uncover deeds, mortgages, wills, divorce decrees, court judgments, tax records, liens, encumbrances, bail bonds and maps associated with the property. This search is designed to disclose any potential title defects or legal issues ahead of time.
2. PROTECTION FROM UNFORESEEN DEFECTS
Even after the most exhaustive title search, there is still a chance that unforeseen title defects could surface long after you’ve purchased your new property. Title insurance protects the policyholder from undisclosed:
• Liens that are the result of a prior owner’s actions, which can be placed against the property by a contractor, tax authority or lender who hasn’t been paid.
• Easements or a third party’s right to use or access your property, even though you are the owner. Say a utility or sewer line runs through your backyard. If so, the utility or sanitation company has an easement allowing them to access your property. That easement could also prohibit you from using your property however you want, such as building a garage or adding a pool.
• Encumbrances or other forms of claims against the property, which can include restrictive covenants imposed by homeowners’ associations or leaseholder rights.
• Outstanding debt from the previous owner, such as mortgages, judgments, unpaid child support or unpaid taxes.
• Conflicting wills or an undisclosed/unknown heir of a previous owner suddenly claiming ownership.
3. PROTECTION FROM UNFORESEEN RISKS OR CLAIMS
If the previous record owner was deceitful, or an error was made in any documents, title insurance will protect you from certain covered risks, not exceeding the amount of the insurance policy, including a defect in title caused by things like:
• Forgery of documents
• Fraud or impersonation of the property’s true owners
• Clerical errors that result in a document not being properly filed, recorded, or indexed in the public records.
4. PROTECTION IN COURT
Should a covered defect in your property’s title or a claim arise, your title insurance underwriter will protect your financial interests, including defend you in court and settle any covered claims for you.
5. A LOW ONE-TIME PAYMENT
Unlike most insurance policies that have monthly premiums, owner’s title insurance requires a one-time fee at closing. This one-time fee typically accounts for about 1% of the purchase price and protects you from covered risks for as long as you or your heirs own the property.
6. DIFFERENT FROM HOMEOWNER’S INSURANCE
While often confused, title insurance is not the same as homeowner’s insurance. The latter protects the property structure and your belongings, while title insurance protects your right of ownership to the property.
7. PEACE OF MIND
Title problems (“defects”) are relatively common. While most of them can be fixed, you can’t fix something that is unknown. Chains of title can go back hundreds of years, during which time documents can be lost, destroyed or never filed. Title defects that come to light after the transaction can threaten property rights and create costly title disputes without the security of title insurance.
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