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What Is Title Insurance, and Why Does It Matter?

Written by Posted On Friday, 06 April 2018 06:16

If you are purchasing a home, you are going to need title insurance.

While most people have heard of car insurance and health insurance, the existence of title insurance may have escaped your notice until you started shopping for a house. It may be an unfamiliar concept.

Worse yet, you may be tempted to skip title insurance. House closing costs are steep to begin with, so trying to economize is understandable.

Don’t skip title insurance, though. It’s very important, and in many locales, you won’t be able to skip it. Here is an explanation of what title insurance is and why it matters.

What Is a Title?

To explain title insurance, we first need to tell you what a “title” is. When you buy a house, you are buying the title to it. Having the title allows you to possess and use the house and any property attached to it for as long as you own it.

The title must be free and clear from any and all claims, encumbrances and liens. By selling you the house and property, the seller is representing that he or she has a free and clear title and is transferring it to you in the purchase of the house.

Why the Title Matters

Sometimes, someone else may own the house or be able to claim they own part of it. This can happen in multiple ways. If the seller, for example, bought it from someone who was undergoing a divorce, their spouse may have ownership or part ownership. The spouse may show up at your front door someday and be entitled to a share.

Previous ownership can occur as a result of unknown wills, bankruptcy proceedings, divorce, gambling debts and more. Previous ownership can be contested due to incorrectly entered deeds, misspelled names and more.

Liens can also exist for multiple reasons. If the house was built eight years ago, for example, and the original contractor was not paid, the contractor can put a lien on the house.

Legal documents can also grant easements, which effectively grant a person or organization the right to enter your property, even though they don’t own it.

If any ownership, encumbrances, liens or easements exist, a free and clear title doesn’t exist.

house and green lawn

Why the Title Needs to Be Free and Clear

If you don’t have a free and clear title, your ownership is compromised. If a long-lost cousin was granted the house in the will of a previous owner, the cousin can show up one day and demand the house.

You need to know your title is free and clear, and so does your lender. Why the lender? Because it isn’t only you who could potentially lose the house. If you don’t actually have the title to it and a legal proceeding or transfer of ownership happens, your mortgage holder won’t get paid.

As a result, part of the closing on a house is a title search. A title company performs a search of all records pertaining to the property. The purpose is to safeguard your ownership. In many areas, a lender will require a title search. If they don’t, you should still have one performed.

What Is Title Insurance?

Insurance, in general, exists to protect against life’s uncertainties. You have car insurance because a meteor could fall from the sky and hit your car as it sits parked in your driveway.

Title insurance exists to protect against there being claims against the title to your house despite a title search. There are multiple reasons why a claim on the title might happen. For instance, sometimes, court or other records are missed or filed under a different name.

There are two forms of title insurance. One is termed “lender’s insurance.” This protects the lender against you not making mortgage payments because you’ve suddenly found you don’t actually own the house, or there’s a lien that demands sale of the house, so the lien can be paid from proceeds.

The other is owner’s insurance. If someone else pops up and has title to your house, all the monies you’ve paid toward it are forfeit. The down payment, monthly mortgage bills — you do not get the money back, because you never owned the house legally.

Owner’s insurance protects you against that. It will also protect you if you suddenly find there are property taxes owed by a past owner. Without title insurance, you are responsible for those. With it, you aren’t.

Most lenders require lender’s title insurance. Not all require owner’s title insurance.

How Do I Get Title Insurance?

In some places, it’s customary for lenders to pay for a title search. It’s also customary in some locales for a seller to buy title insurance.

If not, the best method is to search for rates among title insurance suppliers. There are five nationwide. Be sure to get at least three quotes to make sure you are getting the best rate. Although many online methods of receiving quotes exist, manually calculated quotes are more detailed.

A clear and free title and title insurance are both highly important parts of buying a house. Make sure you stay on the safe side and get both lender and owner title insurance as part of closing on your new home.

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Megan Wild

Hey there! I'm Megan, I'm a home improvement writer, blogger, and real estate investor and observer. Check out my posts for housing trends and latest happenings in U.S. and Pennsylvania!

www.yourwildhome.com

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