What a Buyer Needs to Know About Title Insurance
Aug 18, 2022

When buying a home, one of the most critical aspects is making sure that the title is clear. This is where title insurance comes in. Title insurance protects buyers from any losses they may experience if there are any problems with the title.

Title insurance works as a type of insurance that protects lenders and homebuyers from financial loss due to defects in the title of a property.

The most common type of title insurance is lender’s title insurance, which the borrower purchases to protect the lender. The other type is owner’s title insurance, which the seller often purchases to protect the buyer’s equity in the property.

This article will discuss what a buyer needs to know about title insurance. We will cover topics such as what it covers, how much it costs, and when it is necessary.

Why is title insurance necessary?

First of all, you should know that a clear title is necessary for any real estate transaction. Title companies must conduct a thorough search on each title to check for claims or liens against them before they can be issued.

A title search is a search of public records to determine and confirm a property’s legal ownership and determine if there are any claims or legal process on the property in question.

Investigations can uncover unresolved building code violations, which is an example of defects that can make the title “dirty.”

Title insurance protects both lenders and homebuyers against loss or damage caused by liens or defects in a property’s title or beneficial ownership.

Some of the most common claims against a title are back taxes, mortgage liens, home equity lines of credit (HELOCs), or conflicting wills. Unlike traditional insurance, which protects against future events, title insurance protects against claims from past events.

A primary owner’s title insurance policy typically covers the following risks:

  • Property of another party
  • Wrong signatures on documents, forgery, and fraud
  • Faulty records
  • Restrictive covenants (terms that reduce value or enjoyment), such as unregistered easements
  • Liens or judgments against the property, such as pending judgments and liens

What if you don’t have title insurance?

Let’s take a hypothetical situation to illustrate the importance of title insurance. Think of yourself as a home buyer looking for your dream home, and once you’ve found it, you find that you still have unpaid taxes.

Not having title insurance exposes the parties to the transaction to significant risk in the event of a title defect such as pending taxes. Without title insurance, the financial burden of this back tax claim falls solely on the buyer. And when there is a situation like this, there are only two ways; pay outstanding property taxes or risk losing the home to the taxing entity.

Under the same scenario with title insurance, the coverage protects the buyer as long as they own or are interested in the property.

Similarly, title insurance covers banks and other mortgage lenders from unrecorded liens, unrecorded rights of access, and other defects. In the event of default by the borrower, if there is a problem with the title of the property, the lender would be covered up to the mortgage amount.

Real estate investors should ensure that a property does not have a wrong title before proceeding with any purchase. Foreclosure homes, for example, may have several outstanding issues. Buyers may consider purchasing the owner’s title insurance to protect against unforeseen title claims.

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