A Title Insurance Policy, like other forms of insurance policies, is a contract to indemnify against possible future losses. In this case, it insures against losses arising as a result of defects in your title to your home. Title Insurance Policies provide assurance that you own the specified interest in your property that you think you own.
Types of Title Insurance
There are two types of title insurance policies, Lender’s Title Insurance and Owner’s Title Insurance. Your Lender will likely require you to pay for a Lender’s Policy for their protection. Typically, your lender will be furnishing you with a majority of the money required to purchase your home. Therefore, your lender requires a security interest (mortgage) in the real estate you are purchasing. If the loan is not paid, the lender can force the sale of the property to recover its money. However, defects in the title to the property can make the mortgage of no value. As most lenders simply cannot accept this risk, they insist on title insurance covering properties securing their investment. However, your lender has no obligation to protect your investment.
Remember, your interest is not insured by the Lender’s Policy. Therefore, an Owner’s Policy is important to you as a purchaser. Claims against the title to the property will be your responsibility to defend. If you attempt to sell or refinance your home and a defect is found in your title, it will be up to you to bear the cost of correcting the defect, unless you have purchased an Owner’s Policy to protect you.
Remember that the loan policy only insures the lender that they will be able to successfully foreclose on the property and obtain a clear title. This protection is of little solace to purchasers.
As the owner, you do have an investment to protect, in the form of your down payment and anticipated appreciation value, not to mention your obligation to repay the lender. An Owner’s Policy will protect your interest for as long as you own the property and will protect you after you sell the property from claims made against you for things that occurred before you bought the property. Your policy will be written for the full amount you paid for the property, not just for the amount of the mortgage.
An Owner’s Policy costs comparatively little. It is a one-time premium, not an annual premium. You can obtain a substantial discount in the cost of an Owner’s Policy if you obtain it at the time of purchasing your property and it is processed with the required Lender’s Policy.
Title Insurance is Based Upon A Search of Public Records
Land is a valuable asset that endures over generations. Although its use or level of development may change over time, the title to the land itself is what must be examined. Thus, many people will have had interests in a particular property over the years. Some of these interests may limit the ownership rights of the buyer.
The protection provided by a title insurance policy is based on a title search of the public records that trace the chain of ownership of the property involved. The title search will disclose such things as mortgages, mechanics’ liens, utility easements, and restrictions. Yet, even after an accurate search, a title that is apparently “clear” may turn out to have valid adverse claims. Some of these potential claims include forged documents, undisclosed heirs, hidden marriages or divorces, errors in public records, deeds by minors, fraud, liens for unpaid estate taxes, and court proceedings based upon invalid service of process. The list of possible circumstances goes on and on.
Nonetheless, if the title search is acceptable, the title underwriter will guarantee the insured against loss due to any defects in title not specifically set forth in the policy, including the items listed above, and will agree to pay all expenses incurred in defending any lawsuit attacking the title.