The Ultimate Guide to Title Insurance

Buying real estate means also buying insurance ― several different types, in fact. Private mortgage insurance (PMI) is sometimes demanded by the lender to ensure the loan is repaid if the borrower defaults. Homeowner’s insurance is a necessity to protect the lender’s financial interests.

Then there is title insurance, one of the least understood forms of insurance required during the home purchase process, if you use a mortgage to buy the house.

What is It?

Title insurance is a policy required by the lender to protect it from any other claims to or liens against the property. These items are known as “clouds” on the title and some of the more common include:

Unpaid taxes
Fraud
Forgery
Not including all of the owners’ signatures on the title
Undisclosed heir of a previous owner

The Process

Shortly after escrow opens on your home purchase, someone will order a title search. Who this “someone” is varies by region but it is typically the buyer’s attorney or real estate agent.

The title company or investigator will examine public records, looking for legal ownership of the property and to determine if there are any claims or liens. He or she will follow the “chain of title,” or all previous owners to ensure there are no previous clouds on the title.

When the investigation is complete, the homebuyer is issued what is known as a preliminary title report, listing any findings of the investigation. The insurance policy guarantees that all is well with the property’s title.

The Two Types of Title Insurance

There are two types of title insurance, the owner’s and the lender’s policies. The former is usually issued for the same amount as your loan and is valid for as long as you or your heirs own the home. You will pay just one fee for the policy at closing. This insurance is not mandatory.

The lender’s policy, on the other hand, is a lender requirement and it protects the lender in the event that a claim is presented that wasn’t found during the title search. You will pay the annual premium for the life of the loan.

The party that pays for the title insurance varies by region and the cost at closing can be significant. Remember, the lender’s policy is required and the homebuyer derives no benefit from it should a problem pop up. You will only be protected with an owner’s policy.