Title insurance protects the insured from a financial loss related to the ownership of a property. There are two policies associated with a home loan closing: the lender’s policy, which is often required, and an optional owner’s policy.
After you’ve signed a purchase agreement, a title company or abstractor will check the property’s ownership history. Ideally, the property you’re purchasing has a “clear title.” That means the seller has a total ownership stake in the property without any legal claims against it. Claims can be in the form of a lien or levy from a lender, creditor, or — in the event of taxes due — the government. If there are claims against it, the title company will work with the sellers or claimant to resolve any outstanding issues.
If the examination doesn’t result in any outstanding claims or title defects, why buy title insurance? Because an undiscovered issue such as a mistake in the ownership history, an oversight committed by the title researcher, pending lawsuits or legal judgements, even a previously unknown heir can come up years after the purchase is complete.
An owner’s policy protects you from:
- Unpaid mortgages
- Unpaid property taxes
- Child support liens
- Missing heirs who could claim the property belongs to him or her
- Missed easements or rights of way that could limit your use of the property
A title defect that arises after closing could, at the very least, mean a variety of legal costs — and, in a worst-case scenario, the loss of your property and the money you’ve invested in it. While a lender’s policy protects the lender’s interests in the property, it does not cover the buyer. An owner’s policy, usually issued in the amount of the real estate purchase, offers protection as long as you or your heirs have an interest in the property.