What is Title Insurance and Why Do You Need It?
Buying a home can feel overwhelming and confusing, especially when you encounter new and unfamiliar real estate terminology like “title insurance.” What is this form of insurance, and why is it necessary?
First, the term title commonly means that someone can prove they are the rightful owners of a particular property.
When buying a home, you want to ensure that ownership is legally transferred to you and that the title doesn’t contain any “defects,” such as a legal claim by a long-lost heir or a contractor’s lien to settle unpaid debts. Likewise, a clear title is essential for selling your property to someone else later.
To determine the current legal owner, title companies will examine public records maintained by the recorder of deeds, the county or city clerk, and potentially other tax and zoning records before issuing a certificate of title stating an opinion on the title’s status.
In other words, a certificate of title attempts to answer the question, “Can the seller legally transfer title to the buyer?”
Real estate transactions cannot close without a certificate of title. Still, this document does not guarantee that problems might arise later, such as an unknown heir, or fraud, mistakes, or forgeries in earlier title documents.
Enter title insurance.
Most types of insurance policies protect you against a future adverse event. Title insurance is different. As a homeowner, it protects you from a past event that has not yet come to light.
There are two types of title insurance:
1. Owner’s title policy
An owner's title insurance policy is a one-time expense, paid at the time you purchase a home. It protects your ownership rights.
Title insurance is a good idea for new construction too. Even though the home has never been owned by anyone else, the land has had previous owners. There may be earlier claims on the land, or liens could have been placed during construction.
Incidentally, title insurance is vital if you buy a home (or land) in another country since property tax records may not be well maintained or recorded consistently.
2. Lender’s title policy
Lenders also need title insurance to ensure that their mortgage documents are valid and enforceable and to allow lenders to sell mortgages in the secondary market. The value of a lender’s title policy equals the amount you borrow from them.
Depending on your state laws and local real estate customs—and whether the current market conditions favor buyers or sellers—you may want to ask the seller to pay for your title insurance when you submit an offer to buy a home.
Regardless of who is paying for title insurance, it pays to shop around for the best rates since title insurance is a competitive business.