Reasons to Consider Title Insurance in a Real Estate Transaction
If you require a mortgage to purchase a piece of property, your mortgage lender will always require a title insurance policy to protect them from financial losses that can occur if there are any title defects on the property. Owners can decide whether they want a policy or not. There are two types of title insurance policies:
- Lender's Title Insurance: Mortgage companies require that a title insurance is taken out to protect their interests. The policy does not protect the individual(s) purchasing the piece of property.
- Owner's Title Insurance: This title insurance policy is separate from the lender's insurance policy and covers the financial interests of the buyer(s) should title defects emerge prior to the close of escrow. It also pays for court fees in case litigation ensues.
Why is Title Insurance a Good Idea?
Should title discrepancies arise regarding the real estate transaction in question, your title insurance will pay for the title company to do the work and clear your title, rather than having to assume the responsibilities yourself. Here are a few different scenarios to illustrate why having an owner's title insurance policy can be beneficial.
- The title isn't completely cleared. While it's true that title companies, lawyers, and educated buyers can run title searches to see if a property's title is clear, there can be discrepancies. Take a situation where a husband and wife own a piece of property. They sell it. Only the husband signed the closing documents. Legally, the wife might have a claim to that piece of property and can come forward to contest your purchase.
- An heir comes forward. Your property might have been sold to you by a deceased owner's heir. Unbeknownst to you, there was another person(s) entitled to that piece of property. The heir(s) can come forward and contest your real estate transaction.
- Forgeries. It could come up that somewhere in the history of property ownership, someone forged documents to sell the property. Once the forgery is discovered, the true owners can come forward and sue.
- Improper recording. This could be an improper recording of previous deeds or tax liens. Once the discrepancy is discovered - potentially years down the road - you are protected from any financial responsibility.
- Building/Development issues. While it is not (yet) standard, some title companies offer enhanced construction coverage to protect owners from issues that emerge after the date of the title insurance policy, such as inaccurate surveys, vendors that weren't paid and place a lien on the property and so on. If you're in the middle of a new construction real estate transaction, this might be worth looking into.