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Title Insurance: Little Used, Little Understood, But Vastly Important!

There are many insurances that you’ll almost certainly use. Dental insurance, for example, is utilized by practically everyone with a policy. Vision insurance is also used by practically all who have a policy. Healthcare insurance may not be used annually by everyone, but most people will utilize their healthcare plans at some point. 

Some policies, however, are rarely used. Term life insurance, for example, rarely pays out. But, if you have dependents, you should have life insurance.

Title insurance is another type that, while rarely being drawn upon, is essential. If you have a home, you probably need title insurance.

Many people don’t understand this small, affordable policy. It’s often worked into the mortgage payment, and it can be one of the most important insurance policies you’ll ever have.

Title Insurance: Why You Should Have it for Your Purchase

What is Title Insurance?

Title insurance is a policy that financially protects you or a lender in the even or a third-party claim on your home. By “third-party” we mean someone other than the previous owner of the property (the seller) who makes a claim (legitimate or otherwise) of ownership on the house. “Title” in this case, refers to legal ownership of the property, so title insurance could simply be considered “legal ownership insurance.”

Claims of legal ownership on the property can come from many directions. Even if you have owned the property for  decades, someone could claim that they have ownership rights on the property and that these ownership rights were violated, ignored, or forgotten when the house was sold to you. Through no fault of your own, your legal ownership of the property could be challenged.

A third-party claim can from a long-lost family member, developer, and even neighbors. For example, there could have been a family member who feels they should have gotten a payment when the property was sold. (You can easily see this type of situations arising when a house is sold from a deceased homeowner’s estate.) Developers and construction companies could also make a claim against the title of your home. They may have performed a major construction project, or built the entire house, but were never properly paid.

It’s not uncommon for neighbors to make a claim. Boundary disputes are common problems when homes are sold, so it’s entirely possible that your property may be under question from someone who lives next door.

There are also fraudulent claims against a property title. Forged documents and fabricated paper could impact your ownership. If a forgery of any type was made in the past and it’s in the public record, if that forgery comes to light it could cause an issue with your ownership.

Lender’s Insurance vs Owner’s Insurance

There are different types of title insurance. Most common are lender’s insurance and title insurance.

A lender’s title insurance policy will protect the lender in the event of a title dispute. If the title dispute is honored and the owner/borrower loses the property, they will obviously be less than enthusiastic about making the mortgage payment on a house they no longer own. The lender’s policy provides financial protection to the lender, compensating them in the event of a title problem. If you take out a loan, you will likely have to fund a title insurance policy for the lender.

The other type is an owner’s title policy. This is a policy that protects the owner and occupant of the property, helping to ensure that they can stay in the home if a problem comes to the surface. For most situations, this policy will provide financial compensation to whoever is making the claim, essentially paying them to drop the case.

There is also a third option called warranty of title. This is not an insurance policy, but rather a document that is signed by the selling party. Essentially, this legal document states that the seller is the sole party with the right to sell the house.

Title insurance is rarely needed, but it can be crucial for protecting your home purchase.

Why Should You Have Title Insurance?

Let’s look at a quick example for why you might want insurance. Imagine you purchase a home from a nice family who is moving to another city. This family, you learn, purchased the property ten years ago from an elderly widow’s estate. This widow had three sons, but only two were paid when the property was sold. (We’ll just assume the woman’s will did not address this issue.) The third child, feeling he was cut out of his rightful inheritance, makes a claim on the property, saying he legally owns one-third of the property.

This is where a title insurance policy is helpful. Without the policy, you could be in for a significant and prolonged legal battle with the third son. It could cost thousands of dollars and result in years of stress and worry. With title insurance, however, the third son is paid what he feels he is owed (or close to). He is essentially paid to go away and leave you alone.

Is it Required?

If you are purchasing a home with a loan, it’s essentially guaranteed that you will need to fund a lender’s title insurance policy. An owner’s policy, however, may not be required but it’s often recommended.

Even if you are buying a new home, you should have some type of owner’s title policy. This is because construction of new homes includes many different parties and companies. Some of these companies may feel they are still owed money for their work, and could make a claim on the property being sold.

Typical Costs for Title Insurance

Title insurance is rarely used, but it can be a true ally when you need it. Because so few people will actually draw from their title insurance, these policies can be fairly affordable. Usually a good owner’s policy will cost about $500 to as much as $4,000 dollars, which is usually paid from the beginning.

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Chad Baker, CrossCountry Mortgage   
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