5. Title Insurance Explained

by Local Title

Title insurance is a crucial part of the home-buying process that protects both the buyer and the lender from potential issues related to the property’s title. Understanding what title insurance is, why it’s important, and how it works can help buyers ensure their investment is secure.

What is Title Insurance?

Title insurance is a policy that protects property owners and mortgage lenders against losses or damages related to the property’s title or ownership. Unlike other types of insurance that protect against future events, title insurance safeguards against claims or disputes arising from past events that could affect the ownership of the property. These issues might include unpaid property taxes, liens, fraud, forgery, and other legal problems.

Types of Title Insurance

There are two main types of title insurance: owner’s title insurance and lender’s title insurance.

Owner’s Title Insurance

Owner’s title insurance protects the buyer’s financial interest in the property. It is usually purchased during the closing process and provides coverage for as long as the buyer or their heirs own the property. This type of insurance is optional but highly recommended, as it offers peace of mind and financial protection against title defects that could impact ownership rights.

Lender’s Title Insurance

Lender’s title insurance, also known as a loan policy, is required by most mortgage lenders. This policy protects the lender’s investment in the property until the loan is paid off or refinanced. The cost of lender’s title insurance is typically covered by the buyer as part of the closing costs.

How Title Insurance Works

Title Search and Examination

Before issuing a title insurance policy, a thorough title search and examination are conducted. This process involves reviewing public records to verify the property’s ownership history and identify any potential issues that could affect the title. The goal is to uncover and address any existing problems before the transaction is completed.

Identifying Title Defects

During the title search, various issues, known as title defects or clouds on the title, may be discovered. Common title defects include:

  • Outstanding Liens: Unpaid debts or obligations, such as mortgages or tax liens, that are attached to the property.
  • Easements: Legal rights that allow others to use part of the property for specific purposes, such as utility companies accessing power lines.
  • Incorrect Legal Descriptions: Errors in the property’s legal description that could affect ownership boundaries.
  • Forgery and Fraud: Fraudulent or forged documents in the property’s ownership history.
  • Missing Heirs: Claims from heirs who were not properly accounted for during previous transfers of ownership.

Resolving Title Issues

If any title defects are identified, they must be resolved before the title insurance policy can be issued. This may involve paying off outstanding liens, correcting legal descriptions, or obtaining legal releases from potential claimants. The title company typically handles this process, working with the buyer, seller, and other parties involved.

Issuing the Title Insurance Policy

Once the title issues are resolved, the title insurance policy is issued. The buyer receives an owner’s policy, and the lender receives a loan policy. Both policies provide protection against future claims or disputes related to the property’s title.

Title insurance is an essential component of a real estate transaction, offering protection and peace of mind to both buyers and lenders. By ensuring that the property’s title is clear and free of defects, title insurance helps secure the buyer’s investment and facilitates a smooth transfer of ownership. Whether you’re buying your first home or refinancing an existing property, understanding and investing in title insurance is a wise decision to protect your financial interests.