Imagine closing on your dream home only to discover a few years later that the seller never had the right to sell it in the first place. This scenario is more common than many homeowners might expect. Bankruptcy complications, multiple owners, and forgotten easements can all transform your dream home into a nightmare.
Fortunately, there’s a cheap way to mitigate the effects of this situation. Title insurance is a type of insurance designed to protect against unexpected ownership claims on your home. It can cover everything from an unreported easement to sellers who never owned the home in the first place.
There are two types of title insurance: Lender’s insurance and owner’s insurance. Lender’s title insurance protects the lending institution which provided the mortgage, and it’s a mandatory part of the closing costs on a home. Owner’s title insurance protects the homeowners themselves, and while not legally required, it’s highly recommended, and sometimes required by lenders.
The Purpose of Title Insurance
Owner’s title insurance protects your ownership interest in your home. It gives you peace of mind that no matter what unexpected claims arise against your house, you won’t lose your investment. Depending on the policy and the nature of the claims, insurance can reimburse your lost costs, or pay to resolve disputes.
Ownership disputes aren’t nearly as rare as you might expect. They most often arise as a result of bankruptcy issues and can also come about because of multiple owners. For example, a house might be sold without the knowledge of an out-of-state co-owner.
In addition, even if the ownership of the property isn’t disputed, there might be intrusive and unexpected easements that devalue the home. An easement is a legally enforced allowance for a non-owner to use part of your property for specific purposes. You don’t want to buy a house and find out later that year that a neighbor has an easement to drive right across your front lawn.
Owner’s title insurance ensures that if you do experience any of these unfortunate complications, you will at least be compensated for it.
How Do You Purchase Title Insurance?
Typically, your real estate agent or mortgage lender can recommend a title insurer. The cost of owner’s title insurance is sometimes covered by the buyer and sometimes by the seller, depending on the location.
After you select an insurance company, the first step that they will take is to check property records for any potential title or easement issues that they can find. It’s in the company’s interest to find every outstanding claim, so you can trust them to be thorough.
If they discover that there’s an issue with the title, it will be up to you and the seller how to proceed. Often, the seller can fix the issue; this might be as simple as contacting a forgotten co-owner to sign off on the sale. Other times, the seller might not be able to correct the claim. It would then be up to you whether to figure out the outstanding claims for yourself or to back out of the sale.
If the title check goes well, or if all of the remaining claims are resolved, you can then move on to buying the insurance. Title insurance is a one-time fee, paid when you close on the house. The insurance won’t protect you from any known, outstanding claims, but it will protect you against anything that the company missed that you discover later.
Do You Need Title Insurance?
If you’re wondering whether you really need owner’s title insurance, the short answer is yes. It’s an essential step in protecting your interest in your home. In some cases, your mortgage lender may require owner’s title insurance. If they don’t, or if you have no mortgage, it’s still worth the cost to ensure you don’t lose your entire home to an unexpected ownership claim.
Even brand-new homes benefit from title insurance. In this case, the insurance isn’t to protect against claims on the building, but rather the land. Despite never having had a home on it before, the land might have competing ownership claims or easements.
The Limitations of Title Insurance
Although owner’s title insurance provides peace of mind against unexpected claims, it’s important to understand its limitations. Title insurance is only to protect you from unknown ownership claims that already existed when you bought the house. This includes title claims and easements that the insurance company was unable to spot during their research.
Title insurance does not protect you against known claims. This means that if you knew the ownership of the house was in dispute when you bought it, title insurance won’t help you. Furthermore, title insurance doesn’t protect against new claims that arise after you buy the house. For example, if you grant a new easement to your neighbor, you can’t then claim that easement against your policy.
Owner’s title insurance is an important way to protect your interest when buying a new home. Whether your mortgage lender requires it or not, the small, one-time cost is worth the peace of mind that it provides. A house is typically the biggest purchase you’ll ever make in your life, so it’s not worth taking the risk that an unexpected ownership claim snatches it away from you.