Before you understand title insurance, you need to understand what a title is. Basically, a title is a term that includes all of your legal rights to own, use and sell a piece of land. The title reflects all previous ownerships and transfers, including rights previously granted by other parties, such as mortgages and easements.
If there are problems with the title, the ownership of your land could be in question. Unpaid taxes, a lien (which is an unpaid claim) filed by someone who worked on the house, or any of countless other situations could cause a major problem. And even if you don’t get the land, you might still be responsible for the mortgage! That’s why it’s important to have title insurance.
So what is title insurance?
It is insurance against undisclosed problems with the title, and it protects you against financial loss due to title defects, liens or other matters of public record. Title insurance will defend you against a lawsuit attacking your title, or reimburse you for the actual money lost.
Before a policy is issued, a title insurance company conducts in-depth research to detect, prevent, and eliminate risks and losses caused by title problems. They do this by searching public records to develop and document the chain of title to the property and by identifying all outstanding claims.
For a one-time premium, owner’s title insurance policy will remain in effect for as long as you own the property.
Your mortgage lender will also require a title insurance policy. The lender’s policy protects the lender against any title problems that may affect repayment of the loan. The owner’s policy and the lender’s policy are two different policies, and the one-time premiums for both are usually paid by the home buyer. In a few states, the home seller pays for the owner’s policy. But don’t stop there – there are actually two types of owner’s policies – the basic policy which protects against title claims like fraud, forgery, missed mortgages or judgments and the enhanced homeowners policy which provides additional coverages that many homeowners believe are included with the basic policy, including protection against surprise costs of a contractor’s lien, unpaid homeowners or condominium association dues, permit violations and even certain encroachments onto your land. If you have a question about this, ask your real estate agent, mortgage lender, attorney or closing agent. More information about the enhanced homeowners policy is available here: Sterling Title HOP.