What is Title Insurance and Why Do I Need It?

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Title insurance provides a guarantee that the title your lender holds on a property is free from liens or other title cloud.

Let’s first define “title” and not “deed”. Each document establishes ownership in a different way. The property deed holder is the nominal owner and can live there, rent it, add or modify structures, etc. They are the “owner” of all the property. However, they might still owe mortgage loans on the property.

A mortgage is a loan to buy real estate. It is secured by filing a copy with the county courthouse. The lender holds a “lien” on the property, which is valid until the loan is paid off. If the property is ever sold by the lender, he or she has the “first right to receive the proceeds from the sale.

You can also file liens against property by other means. Maybe a lawsuit or bankruptcy. Maybe a spouse who is divorcing. Maybe a contractor who did work on the property was not paid and filed a “mechanics lien”. Taxes not paid.

Since the beginning of time, various people have owned the land. One of these owners might have died, leaving the property to their heirs. It is possible that there was a mistake in the recording of an ownership transfer or that there was a dispute about ownership that was not properly resolved. These “ghosts” can come to light years later, causing you to lose your property or an heir to a former owner.

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Title Insurance is required by lenders when you borrow money to purchase a property. After they have thoroughly researched the title, courthouse records, and other public databases, the Title Insurance company issues this insurance policy. They will issue title insurance to back up their research.

The policy will remain valid until the time you sell. Any future buyers will need to buy title insurance to cover any liens that may have been incurred while you owned the policy.

This is how you should understand your coverage: it covers the period prior to your closing date for purchasing your property. The coverage ends at that time, but it extends indefinitely back as long as records are available. You cannot claim against your title insurance if you create a new lien, such as if you fail to pay taxes. This lien must be paid from any proceeds of any future sale. However, mistakes can happen and the next owner will need to have title insurance.

Two policies are available: one for the lender and the other for you. It covers the loan amount only. An owners title policy is an optional option that covers your equity in addition to all loans. It is possible for your title to become clouded. What happens if someone tries to steal your identity and gets a second mortgage? What happens if a neighbor builds on your property, either intentionally or not? If you don’t file suit within the time limit, the neighbor can eventually acquire title to your land. You should ensure that your owners policy covers you against such risks.

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The cost of insurance and title search vary from one state to the next. This could be due to a variety of factors. One reason could be that land records have not been modernized. Also, performing a title abstract (or research) is more time-consuming and more prone to error than in states with computerized record-keeping. Some states include the search in the policy premium, while others charge separately. While some states require that an attorney be present at every closing of real estate, many do not. These variables have an impact on the cost of title searches and insurance premiums.