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Do You Need Title Insurance?

Do you need title insurance?: House with keys and money.

All your hard work has paid off. You just found your dream house. Maybe you even managed to get a deal on it. Or, maybe you paid 20% over the list price. It's still your dream house, and you'll figure out a way to come up with the 20%. You'll cut expenses, starting with that thing called title insurance. After all, the house is in the city, and it has had the same owner for the last 40 years, so how could there be any problems with the title?

In this article, we answer your questions about title insurance — and whether you need it: 

What Is "Title" and Why Do I Need to Insure It?

When you buy a new home, you don't get handed the piece of land -- you are given title. A title is the owner's right to own and use the property. How a home is titled can vary. For example, you might hold the title as tenants in common or as joint tenants, there may be a right of survivorship, or there might be a life estate in the home.

In addition, as you might imagine, there are many uses for land, and rights can be given or sold for such uses. Someone other than the previous owner of the property itself may own mineral, air, or utility rights on the property. A bank with a mortgage loan on the property owns an interest in the property, as does someone who has done work on the house and filed a lien against it. The government may also have liens against the property for unpaid taxes, and the city may have an easement giving it the right to string utility lines across the front yard.

How Does Title Search Help?

Doing a title search before a home purchase will reveal many of these potential problems. A title search is done by examining public records to look up the history of property ownership. You can do your own title search, assuming you know what to look for. But if you are planning to get a loan to enable you to purchase the property, the lender will require that a qualified third party do the title search.

The title search shows not only limitations on the use of the property and rights others may have in the property, but also any encumbrances like liens or monetary obligations that are outstanding against the property.

What Is Title Insurance?

Most people are familiar with other types of insurance that cover events that have not yet happened — automobile liability insurance, medical insurance, and life insurance are examples of such policies. Usually, these policies exclude events that occur before the date the policy is issued. In other words, you cannot get life insurance on someone who has already died, and you will not find an insurance company willing to give you insurance coverage for a car accident that has already occurred.

Title insurance, on the other hand, covers events relating to the title that have already happened. It does not cover anything that happens to the title after the date of issuance. So, for instance, if you have liens filed against the property for taxes that you didn't get around to paying, your title insurance policy is not going to help you. But, if the lien is for taxes not paid by someone who owned the house 80 years ago, then you may have coverage under your title policy.

How Do I Get Title Insurance?

Before offering to issue a title insurance policy, a title company will do a title search to learn whether there are any problems or limitations with the title. This search is done in an effort to minimize the risks of offering insurance. By minimizing the risks of claims being made, a title insurance company is able to offer its insurance policies for a relatively low, one-time fee.

Problems such as deeds, wills, and/or trusts that contain incorrect names, outstanding mortgages, title defects, judgments, and tax liens, easements, or incorrect notary acknowledgments are generally found through the title search and usually can be cleared up before the closing on the property. When these problems are not cleared, they will often be listed as exceptions to the policy's coverage. You would then need to decide whether the property is still something you want to purchase given the known problems with the title.

Perhaps you are wondering what the point of title insurance is if the title company won't cover known problems with the title. Isn't it like buying medical insurance that won't cover you if you get ill? The answer is "not really". There can many problems with a title that even a diligent and trained eye may not uncover during a title search.

What Title Problems Can Arise?

Examples of problems that can come up after you purchase your property include fraudulent acts by prior owners such as:

  • Forged documents that transfer no title to the real estate
  • Forged mortgages, or forged satisfactions or releases of mortgages
  • Impersonation of the true owners of the land by fraudulent persons 
  • Instruments executed under expired or fabricated powers of attorney

The deed may also have been executed by someone who forgot to get divorced before they remarried, who forgot they got divorced and has inherited the property as the surviving spouse, or who forgot that they already sold the property to another purchaser who is now in possession of the property.

Another problem could be that you have acquired a perfectly good title to a piece of property for which there is no legal access.

Other Problems With Title

Other problems that may also impact on the use and enjoyment of your property include the following:

  • Execution of the deed by someone who is minor or otherwise not competent
  • Mistakes in public records or mistakes in recording the legal documents. Such mistakes can include incorrect indexing, errors and omissions in transcribing due to similarity in names, and failure to preserve original instruments.
  • Defective acknowledgment due to lack of authority of notary 
  • Descriptions of the property that appear to be, but are not, adequate
  •  Erroneous location of an ancient pipe or sewer line which does not follow the route of a granted easement 
  • Invalid, suppressed, undisclosed and incorrect interpretations of wills
  • Previously undisclosed heirs with claims to the property 
  • Tax titles which are invalid because of irregularity in the proceeding 
  • Liens for unpaid estate, inheritance, income or gift taxes and/or special assessments which become liens

Title Insurance Coverage and Claims

Although the events that cause these types of problems happened before you purchased the property, a good title insurance policy will provide coverage for the consequences of these events as they affect your ownership of the property. 

How Does Title Insurance Work?

In the event that there is a claim against your rights of ownership in the property, your title insurance company will cover the cost and fees associated with defending against the title claim. The policy will also cover, up to the face amount, any loss of title or the cost of perfecting the title. Without title insurance, you may be faced with huge legal fees and costs and even the loss of all or a portion of your dream home.

There are two types of policies available, a lender's policy and an owner's policy. 

Lender's Policy

Your lender will probably require that you obtain a lender's policy. The lender requires this because the loan is made with the property as security. Any defect in the title of the property affects the value of the lender's security. Because the lender is only interested in protecting its security, the lender's policy only covers the amount of the loan. As you pay back the loan, the value of the lender's policy decreases.

Owner's Policy

Your equity in the property is not covered by the lender's policy. As time goes by and you pay back your loan, your exposure increases unless you have an owner's policy, which covers the total amount of the value of the property at the time the property is purchased. 

The cost of an owner's policy is relatively low since the increase in the risk for the title insurer is not much greater than if it only insured the lender's interest. Since your interest, unlike the interest of the lender, may increase over time, you may want to consider purchasing an inflation rider that will adjust your amount of coverage to reflect the increase in the value of your property over time.

Facing a Title Claim? Get in Touch With a Real Estate Lawyer

One way to help ensure that you actually hold ownership of a property is to insure the title. Without it, the cost of defending a title claim would be quite high. In order to improve your chances against such claims, you should consider working with a real estate attorney experienced in such actions.

Next Steps

Contact a qualified real estate attorney to help guide you through the home buying process.

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