What Is Title Insurance, and Why Do You Need It?

What Is Title Insurance, and Why Do You Need It?

What Is Title Insurance, and Why Do You Need It?

Title insurance is often mentioned briefly during a real estate transaction, but many people do not know what title insurance is and why they need it. The truth is that title insurance is not commonly used. However, if you need to file a claim, no other coverage protects your most significant investment in the same way.

For most people, purchasing a home is the biggest expenditure of their lifetime. They save for a down payment, diligently pay their mortgage, improve the property, and grow equity. If something challenges their ownership of that property, it puts this all at risk. Title insurance is the best option for fighting for the property or recovering money for the investment made. For more information, reach out to a real estate lawyer for title insurance.

What Is Title Insurance?

Title insurance protects your investment when you buy property. It protects the purchaser from any issues that arise related to the property’s title. You should have title insurance on any property you own since there is no other way to protect your investment and equity if an issue with the title arises later.

Many situations call into question the legal owner of a piece of property. While this does not occur in most real estate transactions, it probably happens more than most people realize. Having an insurance policy protects the investment and allows you to recoup your money if someone else has a legal claim to your property.

There Are Different Types of Title Insurance Policies

There are usually two different title insurance policies:

  • The owner’s policy: This policy protects the buyer and their money. It pays to cover the investment they made on the property when necessary. This generally includes the purchase price and any additional coverage purchased.
  • A loan policy: A loan policy protects the lender from losing money if there is a problem with a title and the borrower loses property. This policy pays off the mortgage. Most banks require this coverage if there is a loan based on the property.

Companies that issue title insurance, including many real estate law firms, work to clear the title before they write a policy. This work greatly reduces the risk of a claim. They check the most recent transactions for any problems and consider other factors that could create an issue. Once they see everything was done properly, they issue the insurance policies.

A thorough title search does not mean you do not need the insurance coverage, though. Some situations are almost impossible to uncover through this process. Issues could occur years after a transaction, so buying title insurance is a good idea.

What Situations Can Title Insurance Help Prevent?

What Is Title Insurance, and Why Do You Need It?

When you buy property, you receive the title and the right to occupy and use the land. As long as you work within the applicable codes and follow the regulations, you could build a house, renovate the home, or make other investments. Many families spend a lot of time, energy, and resources to make their new house perfect for them.

What happens when someone else has a claim to that same title and right to occupy the home? It could limit your rights and even cost you the property, including the buildings you built or renovated. This is where title insurance comes in.

Disputes Over Ownership, Forged Documents, and More

Any number of issues could cause a problem with a real estate transaction, leading other parties to believe they have a legal claim on the property in question.

Problems could include:

  • Forged signatures or falsified documents at any point in the property’s transaction history
  • A transaction completed by a seller not of sound mind
  • Disputes over property lines
  • Estate disputes or unsettled estate matters
  • Errors in public records, such as clerical mistakes on the deed
  • Unsettled liens or other encumbrances on the property
  • Unresolved building code violations

The goal of title insurance is to prevent losing your investment any time someone else has a legitimate claim on the property you purchased. Any situation where the ownership of your property is in question could bring a title insurance claim. These issues vary from relatively simple to resolve to almost impossible to clear.

If not uncovered during the title search, the issue with a title could show up at any point in the future. It could be a few weeks or several decades after buying the property.

If an issue arises, you should consider contacting a real estate attorney as soon as you learn of a possible problem. You do not want to jeopardize your property or investment by saying or doing the wrong thing. Enlisting the help of a lawyer as soon as possible could be in your best interest.

Is Title Insurance Required?

For most homebuyers, title insurance is required. If you pay cash for your property, you probably do not have to purchase title insurance. However, it is often necessary if you have a mortgage. Most finance companies and banks require it to cover at least the cost of the loan. This is a lender’s policy.

Even if it is not required to cover your purchase, you should consider an owner’s title insurance policy. If you buy a house and do not invest in title insurance, you could lose the equity in your home if something happens. Any challenge to the validity of your ownership could mean losing everything you paid, including your down payment, any investments for improvements, your mortgage payments, and more.

Title insurance is not expensive, and it plays a key role in helping families retain their financial stability when something goes wrong with a title. This makes it a worthwhile investment for property owners.

Who Pays for Title Insurance?

Who pays for title insurance depends on location and the agreements made during negotiations. In many areas, the seller pays for the owner’s policy, and the buyer is responsible for the policy to cover the lender’s investment. However, this is not always the convention in all areas. Sometimes, the buyer might pay for both policies if they choose to also have their own coverage.

To get a better idea of how this usually works near you, a real estate attorney consultation can help. A professional can answer your questions, address your concerns, and provide guidance on this and other topics related to your sale or purchase.

Having an attorney on your side might be an advantage when it comes to getting title insurance written into your contract, too. They often review sales agreements for clients and help them negotiate deals that include stipulations, such as paying for title insurance or sharing the closing costs. This is a common way to add value to your purchase without reducing the offer.

How Do I Get Title Insurance?

While title insurance is usually a part of a real estate transaction because of requirements from lenders, you have the option to purchase additional coverage or otherwise alter the agreement. You will need to discuss this with the party preparing your sales agreement, the title company, or your lawyer.

Getting additional coverage is especially important for those purchasing land and planning to build a home. If their policy only covers the purchase price, which is typical, they will lose out on the additional money invested into the property if something happens and there is a dispute over the title.

Your real estate lawyer or title company should help you set up the purchase of the policies and coverage you need. Working with an attorney who also handles title services is a good idea because they can offer legal advice in addition to discussing how title insurance works and your coverage.

What Is the Title Insurance Process?

Before any real estate transaction, someone must conduct a title search. This is generally a staff member from a real estate law firm or title company. The title search is the first step in the process of issuing title insurance, too.

The purpose of a title search is to document that the party offering the property for sale has the right to sell it. That is, they are the rightful owner of the real estate. The search looks at all paperwork and past transactions related to the property. It checks for liens, disputes, inheritances, and sales.

This search uses public records to determine:

  • Who owns the property
  • If there are any challenges against this ownership claim
  • If there are any liens against the property
  • If the property has a marketable title, meaning it can be legally sold

The hope is to find nothing that could negatively affect the future property owner, so they can insure the title and allow the sale to go forward as planned.

What Happens if There’s an Issue With a Property’s Title?

When the property search uncovers an issue, the attorney or title company might try to resolve the issue. This is often possible. After all, they do not want to have to cancel a sale, either.

Sometimes issues get resolved by:

  • Contacting the property owner and asking them to handle the problem
  • Having the property owner pay off a lien
  • Having parties sign a release stating they have no claim to the property
  • Using a quit-claim deed or another tool to resolve a potential issue

If your lawyer uncovers a more serious issue with the title, it could invalidate the sales agreement. Without a clear title, mortgage companies will not finance a purchase, and most cash buyers do not want to take the chance, either. The property owner will need to resolve the problem before trying to sell the house.

What Properties Does Title Insurance Cover?

Some people think that you only need title insurance if they’re purchasing a single-family home and the land it sits on. That’s not the case. Title insurance offers coverage regardless of a property’s designation.

For instance, imagine you’re buying a storefront for your business. There could still be claims to ownership and other issues that could necessitate title insurance. The same applies if you’re purchasing a condo or an apartment.

How Can I Learn More About Title Insurance?

While your real estate agent will likely answer your basic questions about title insurance to the best of their ability, they cannot offer legal advice. In many cases, they might not have the knowledge or experience to answer your questions in the detail, either.

To get detailed information about title insurance, the process, or whether you need it, you want to talk with a real estate attorney or title company. They are the best authorities on how this type of insurance works, how they clear titles, and how to get coverage. Consult an attorney to navigate the process and protect your rights throughout.

Some real estate law firms also operate as title companies, handling this part of the transaction and overseeing closing. This makes them invaluable for providing advice and guidance about buying or selling property, whether you use a real estate agent or not.

You Could Discuss Your Options With a Real Estate Lawyer

Jordan Lulich
Jordan Lulich Vero Beach Real Estate Attorney

A good way to ensure your property sale or purchase is done correctly is to work with an attorney who handles this process every day. In addition to reading contracts, offering advice, and managing closing, they often deal with titles, too. Reach out to a real estate lawyer.

You can contact a real estate attorney to learn more about title insurance and how to make sure you have enough coverage to protect your investment and equity. A real estate law firm can offer advice and guidance while handling clearing the title and insuring it.