Every time I write an offer, I go through the Purchase Agreement with my client, to explain the ins and outs and make sure they understand what they're agreeing to (it is a legally binding document after all). After doing this for several years, I can almost anticipate what questions they're going to ask before they ask them. The one question I can always count on is, "what is title insurance, and what does it cover?" This is a simple question with a somewhat complex answer. I've found that very few of my clients, even those who've purchased or sold a home before, have ever had this explained to them. An often overlooked, or at best, glossed over, component to most purchases (all of them if a mortgage is involved), Title Insurance IS important, and YES, you do need it!
Let's start by answering the big question, "What is Title Insurance?"
In Short, Title Insurance protects the land/homeowner and the Lender (if there's a mortgage) against defects in the properties title.
When purchasing a property, the Title Company will conduct a title search and examination to discover any defects in the title as well as any liens or encumbrances on the property. These could be items such as unpaid property taxes, Mortgages and Mechanic's Liens. In order to convey clear title, the property owner will have to cure all of these items (most often these items are paid for out of the Seller's proceeds at closing).
Here's the catch: Title search and examinations are limited to what's in the public record. Liens that haven't been recorded at the time of the sale, conflicting Wills of the selling party and other encumbrances could go undetected if they haven't been properly recorded at the time of the sale. If these items have been attached to the property, and you don't have Title Insurance, guess who's on the hook, that's right, YOU.
In most cases, at least where a Mortgage in involved, there will be two title insurance policies issued. The "Owner's" policy covers you, the Buyer, against defects in the title. This policy will cover the value of the home. The "Lender's" policy will cover the Lender's investment in the property against any defects. Assuming you're putting some cash down, the Lender's policy will be for less than the value of the property.
In many cases the property seller will cover the cost of the Owner's policy, while the Buyer will cover the cost of the Lender's policy. These premiums are paid at closing, and do not have annual premiums as traditional Homeowners' Insurance does.
So the next time you purchase a home, and your agent gets to the Title Insurance section of the contract, hopefully you'll have a better understanding of what this is, and if you think to yourself, "is this really necessary?" The answer is YES!