What is Title Insurance?
“Why do I need title insurance?” That might be the second most common question new homebuyers ask their Realtors.
That’s after they ask the most common question: “What is title insurance anyway?”
Most people have never heard of title insurance until it’s time to buy their first home. When they sign the contract, they may notice the reference to title insurance and give their Realtor a blank stare as he explains it. Then, when they see the premium among the long list of fees and charges to pay at closing, they might start asking if it’s really necessary. Oh, and by the way, based on the HUD, it looks like the lender is getting a title insurance policy too, so isn’t that really quite enough?
These are great questions and ones every savvy (or even bewildered) homebuyer should be asking.
What is title insurance anyway?
Let’s take a look at what title insurance is first, then explain in more detail why it’s so important for your real estate transaction.
Title insurance is a unique form of insurance because it protects you against ownership claims against your property. Unlike other types of insurance, your title insurance policy, for a one-time premium paid at closing, provides protection to you and your heirs for as long as you own your house. Also unlike other types of insurance, title insurance protects you from events that happened in the past: a forgery, forgotten heir, or other claims by people or entities who may truly (but unbeknownst to you) have a right to your property.
Is title insurance optional?
Many people think that since it’s protecting against events in the past, title insurance is something they can choose to forego. After all, the title company did a search of the property already. Why not just review the commitment and forgo the policy? It’s a common misconception that a title search will uncover every possible defect in title. Title searches only discover events and documents of public record, so anything done illegally or without proper documentation may not be known until some time in the future. Remember, even the most thorough title search is prone to human error. And even if the title company has done their job perfectly, there may have been an error in recording or at some other step in any previous transaction including the property. Lenders do not consider title insurance optional. In fact, nearly all institutional lenders insist on having their own policy separate from the owner’s policy. If it’s important for their partial investment in the property, it is even more important for the homeowner to be protected for the full value of the home.
