Ask Brian: What is Title Insurance and Why Do I Need It?

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Question from Patti in GA: Hi Brian, Why is the paperwork to buy a house so lengthy and confusing? I’m buying my first house and a friend told me that I’ll spend a couple of hours at the closing signing a pile of papers that I probably won’t understand much about. So, I asked my agent what this is all about and what I should expect. He went through a checklist with me and explained what documents I can expect to review and sign. After I left his office, I realized I still had a few questions. The most important question that I still have is about title insurance. My agent said something about it being insurance that the seller has the legal right to sell the property to me. There are a lot of insurance costs going on here. I understand the homeowner’s insurance and I’m not fond of it, but I understand the mortgage insurance that I pay but is for the benefit of my mortgage company. But why do I need title insurance that guarantees the seller has the right to sell the house to me?

Answer: Hello Patti. Yep, there is a pile of paperwork that you need to understand and sign at closing. You’re wise to have started asking questions before you are confronted by it all at one time. When it comes to title insurance, your agent might have oversimplified it or you might not have caught everything that was said about it. There is more to it than just insuring the seller has the right to sell the property to you.

Title insurance protects you from financial loss and related legal expenses in the event there is a defect in the title to your property that is covered by the policy. Title insurance differs from other types of insurance in that it focuses on risk prevention, rather than risk assumption. With title insurance, title examiners review the history of your property with the intent of eliminating title issues before the purchase occurs. Title insurance also differs in that it comes with no monthly payment. It’s a one-time premium paid at closing.

It's more than just insuring the seller has the right to sell because it covers many situations that the seller might not even be aware of. Patti, this is probably the biggest purchase that you’ve made in your life, and you’ll be obligated to pay the mortgage for many years to come. You want to be sure that you are receiving a clean title or in other words, that another person or company can’t claim they have a legal right to part or all of your home. Any number of title issues may arise, even after the most meticulous search of public records. Most houses have been bought and sold several times over the years. There is a potential for discrepancies in those large piles of papers that might have happened several sales ago. These hidden defects are dangerous because you might not learn about them for months, or even years, after purchase. Some common examples of risks covered by your Owner’s Policy include defects in title caused by:

• Improper execution of documents.
• Mistakes in recording or indexing legal documents.
• Forgeries and fraud.
• Undisclosed or missing heirs.
• Unpaid taxes and assessments.
• Unpaid judgments and liens.
• Unreleased mortgages.
• Mental incompetence of grantors on the deed.
• Impersonation of the true owners of the land by fraudulent persons.
• Refusal of a potential purchaser to accept title based on the condition of the title.

There are also two types of title insurance. An Owner’s Title Policy is designed to protect you from covered title defects that existed before the issue date of your policy. If a valid claim is filed, your owner’s policy (subject to its terms and conditions) covers financial loss up to the amount of your policy. The other type is for the benefit of your lender. A Lender’s Policy provides no coverage to the homeowner. A Lender’s Policy insures that your lender has a valid, enforceable lien on your property. Most lenders require borrowers to purchase this type of insurance policy to protect their investment.

Patti, I hope that gives you a better understanding of title insurance. If you still have questions about this or any of the other closing paperwork, don’t hesitate to ask questions of the real estate professionals that are helping you purchase your first home. Besides your agent, these can include the title insurance representative, escrow agent, home inspector, lending representative, and others. If you are not satisfied with all the answers that you are receiving, you might want to hire a real estate attorney to review the paperwork on your behalf.

What can you add about title insurance or the other closing documents? Please leave a comment.

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