When you're purchasing a home, you may notice a line item that you don't recognize: title insurance. Title insurance may be difficult to understand to those who are not in the real estate industry. At its most basic, title insurance ensures that you are the new owner of the property and that the property has no other encumbrances.
Titles Can Be Extremely Complicated
You might think that it's clear who owns a property -- but legally it may not be that obvious. There can be many issues that disrupt a sale, such as a contractor lien or a lien by a homeowner's association. Further, the actual transition of property may not always be legal; for instance, a deed could have been improperly transferred to someone years ago. As an example, during the housing crisis, some mortgage companies foreclosed on houses that were fully paid off. Though the mortgage companies took control of the property, they were not legally entitled to. All of this together can complicate a title and potentially disrupt a sale.
The first thing a title insurance company does is run a title search on your behalf. This gives you the opportunity to resolve any of the above issues before the sale occurs. In situations in which liens need to be paid, the amount can then be paid by the seller of the home so that you have a fully released title. Though you won't become responsible for these liens directly, they will be able to complicate any sales in the future. If a lien is not properly released, you might not be able to sell your home later on.
Title Insurance Works to Advocate On Your Behalf
Apart from ensuring that the title is clear, the title insurance agency also acts as an advocate for you in the event that complications do arise. Though a title search should reveal everything on the title, there are times when it may miss something. Companies such as TitleSmart will be able to work with an owner to legally untangle any additional claims to the property. Otherwise, some owners may find themselves out of luck or paying off significant legal fees in order to keep control of their newly purchased home.
Title issues aren't just liens. Sometimes they could also be homes that were purchased due to fraud; a prior owner, for instance, could have purchased the deed from someone who didn't actually own it. Without title insurance, you could end up both without your home and still owing on your home's mortgage. It would take a significant legal battle in order to get reimbursed from the mortgage company.
Regardless of whether you personally feel that you need title insurance, your lender is likely to require it. Unless you're purchasing a home in cash, a mortgage company will always want to properly insure its investment. Though you may have control over the title insurance company that you use, you usually will not be able to decline it altogether. Ultimately, this is a good thing, as title insurance is a very small fee to protect you from a very substantial potential for loss.