What is Title Insurance and Why Do You Need It?

(For Home Buyers and Lenders)

The good news is that title insurance is a one-time expense (non-recurring). You don’t have to pay for this monthly, quarterly, or annually. Title insurance is different from car or health insurance. Once you pay it at closing, the policy remains in effect as long as you own the home or are on the title to the home. The reason for this is that the title company is responsible for knowing everything the policy covers at the time it’s issued.

Their ability to know everything covered is what makes title insurance different from most types of insurance. Specifically, it looks backwards in time rather than forward. It extends indefinitely into the past. However, it doesn’t cover what might happen in the future.

What is Title Insurance?

Title insurance is all about protecting, you as the new owner of the property, from what might have happened regarding ownership in the past. Issuing title insurance is a two-step process. The first step is the insurance company researching the past ownership of the property. They search for flaws on the title or what are called “clouds” on the title.

This is significantly different from property or homeowners insurance. While property insurance deals with liability and disaster, title insurance does not cover things like slips and falls or a house fire. Title insurance only covers the right to ownership of the property as recorded on the title.

The first step in the process, an attorney completes a title search. The attorney researches documents related to the history of ownership. It looks for things such as fraud, undisclosed heirs, unpaid taxes and/or tax liens, recording errors, pending legal disputes, and other problems with the deed or title.

Why You Need Title Insurance

You have no control over how property ownership was previously recorded. Many times, more than one person or entity (business) may have had ownership rights. A couple of examples include a married couple could sell their home during a divorce and legal ownership could be in question at the time of the sale.  Another possibility is a tenants-in-common ownership could have existed and one tenant dies with unknown heirs having a right of survivorship. The property could have been in a trust or an estate where the right to make a sale is questionable.

The point is, this requires knowledgeable and professional people to be sure you are buying property with a “Clear or marketable title.” This uncertainty is the reason for the second step of the process - issuing an insurance policy that you are receiving a clear or marketable title.

That doesn’t mean you should expect to have title problems but it does mean that any potential problem will be fixed before you take ownership.

Who is Title Insurance For?

If you are taking out a loan secured by the property, the lender requires title insurance to protect their interests. You don’t have the option of doing your own research.  

There are generally two types of title insurance. One is for the lender and the other is for you (the new owner). You can think of these as similar to car insurance where you purchase insurance for your own car as well as for another car that you might be in an accident with.

Lender’s title insurance. This policy specifically insures the lender that you will be the property owner. It also insures that the lender will have a valid mortgage lien against the title. It protects the lender in case something comes up from the past to create a problem with the title. You can expect this to be a separate line item on your closing documents.

Owner’s title insurance. This policy protects you rather than the lender. The insurance company becomes obligated to make you “whole” if anyone comes forward to challenge your ownership in the future. If you don’t have a lender or a mortgage, you should not have to pay for lender’s insurance. In that case, you may not be required to take out an owner’s policy. However, considering the relatively low one-time cost, risk, and your peace of mind, it’s a no-brainer that you want this protection for yourself.

Selecting Title Insurance

You should have the option to shop around for your title insurance provider. You can expect a substantial discount when you purchase both the lender and owner policies as a package. For the most part, there are about four major national providers and you might find a few local providers. If you do shop around, be sure you are comparing apples-to-apples regarding the quality of the title search and the quality of the title insurance. One place you might find a difference in the price is by asking about associated fees such as any wire charges or courier fees. You may also want to include an inflation rider to compensate for the increase in the value of your property over time.

A tip about picking title insurance is not using the same company as the previous homeowner. As long as you’re paying for this, you should have a fresh set of eyes do the search rather than rely on old documents the previous insurer might have on file.

If you need more information or have questions, reach us by sending an email or calling us at (678) 570-8123. We'll be glad to help you!