How Does Owner's Title Insurance Work When Buying a Home?

When you begin buying a home, there are many things and steps you may not have thought much about. It is likely at some point, you will hear about title insurance.

From thirty-seven years of experience in the industry, I can tell you that many potential buyers will ask what title insurance is and how it works.

There are two types of title insurance: a lender's and owner's policy. We will examine what you need to know about owner’s title insurance.

What is Owners Title Insurance?

Buying a home includes some risks. You are putting your financial future on the line; if anything goes wrong, it could be costly to make it right.

You cannot know whether a previous owner did everything correctly with the paperwork or if fraudulent activity occurred. While a title search could uncover potential problems, not everything can be caught.

Many problems could affect the title of a home, including the following:

• Mortgage fraud. If a previous owner didn't pay the mortgage but made it look like they did, their lender could still have a claim to the property.
• False information. If the wrong information or a forged signature was used, the deed could have problems.
• Errors in the deed. If details have been incorrectly filled out, legal ownership of the home could be in question.
• Liens. A lien could have been placed on the title if a previous owner failed to pay their bills.
• Easements. There could be a right of access to the property that wasn't previously revealed during the buying process. See easements in appurtenant for more details.
• Encroachments. There might be property line disputes with a neighbor, perhaps with a fence or parts of their home encroaching upon your property.

Any of these issues could lead to a third party claiming the property you are about to buy. Even if the home appears to have a clear title following searches in public records, some problems could still be hidden.

Title insurance for owners protects them against losing out financially should an unexpected claim be made on the title.

How Do the Owner's and Lender's Title Insurance Differ?

When you are using a mortgage to buy your home, your lender may require you to purchase a lender's title insurance. This policy will protect the lender’s money should homeownership be contested.

While this insurance policy protects the lender, it does not protect the borrower. You must buy owner’s title insurance if you want the same protection.

Owners insurance becomes more valuable the longer you live in the home. As you pay off the mortgage, your equity in the home increases, and you have more to lose should the ownership be challenged.

Do You Have to Buy Owner's Title Insurance?

A title insurance policy for owners isn't always required. This can be confused with a lender's policy which is almost always required when getting a mortgage. No law requires you to purchase an owner's title policy if you don't want to.

However, most real estate agents agree the cost of an owner's title insurance policy is well worth the money.

Who Has to Pay for Title Insurance?

As you might imagine, since the owner benefits from the policy, they pay for it, but often this isn't the case. Some states require the seller to purchase title insurance for the buyer. And in a few states, the purchase price for the policy is divided or negotiated between the buyer and seller.

How Does Owner’s Title Insurance Protect the Buyer?

Buying this insurance policy is a one-off fee, and it protects you against a possible financial loss should there be a problem with the title. If someone believes they have a claim to your property and sues you, the insurance will pay your legal bills and court costs.

If a previous owner fails to pay all their property taxes, the state might demand that you pay this bill as the new owner. But if you have a policy, the insurance company will pay the tax bill.

The Pros of Owner’s Title Insurance

• Fewer things to worry about
• A low cost compared to the potential risk
• Even if the home is brand new, there could be disputes over land ownership or payments to contractors.
• If you are buying an older home, there is a greater chance of problems with the title.

The Cons of Owner’s Title Insurance

• Title insurance could cost a few thousand dollars, but the chance of you needing it is low.
• The benefits are less if you do not expect to live on the property for very long.

While the cost of insurance could be an expense you could do without when buying a home, you need to consider the potential downsides should something be wrong with the title. Your legal fees will also be covered should you face legal action because of a title dispute.

Final Thoughts

Whenever a potential Massachusetts buyer asks me if title insurance is worth it, my answer is always the same. You bet it's worth it! If a problem occurs with the chain of title, you'll be glad you had this insurance.

While it is expensive to purchase, if there is a problem, it could be far more costly not to have it. You will never want to be without this type of insurance when you need it.