When you purchase a home, the legal ownership, also known as the title, is transferred to you. That ownership comes with a risk most home buyers aren’t even aware of – problems with the title.
Before you close on a home you are buying, a title researcher or attorney will research records to ensure that the title of the house is clean, meaning there are no problems such as undisclosed heirs, unpaid taxes, pending litigation and a number of other issues that could prohibit the transfer.
But even the most thorough property search can miss something. And then there are unforeseen problems that may arise after the purchase that could cost you money and even potentially lead to you losing the home.
What if a contractor hired by the previous homeowner claims there are unpaid debts for property improvements they made for the previous owner? Or if there are issues with your property lines, like finding out that your home is actually built on the wrong lot and the legal owner has hired an attorney to claim their property? Other issues that even the most thorough title research can miss are forged documents, mistakes in the public records and missing signatures.
While such problems are rare, they can be a nightmare to resolve, which is why it is important to purchase title insurance during the closing. Title insurance helps to ensure you maintain ownership of the home if issues regarding the title arise.
Two Different Types of Title Insurance
There are two different types of title insurance you will encounter as you go through the closing. One is lender title insurance. If you are borrowing money for your home purchase, the lender will require you to purchase lender title insurance. This protects the lender’s interest in the property.
But it doesn’t protect you, the homeowner.
That’s why you need to purchase homeowner’s title insurance. It protects you from claims against the title, even those that predate your ownership of the home. If a title defect is found, the title insurance company will cover the costs to remove the issue. If the title of the home is challenged in litigation, title insurance will pay for you to defend yourself in court if needed. If you are unsuccessful in winning your case, the title insurer will reimburse you for your total investment in the property. The insurance policy is good as long as you, your trust or your heirs on the property.
The owner’s title insurance policy is treated as an optional cost in the closing. You are not required to purchase it, but it is highly recommended that you do. It may seem like just another cost or fee when you may be looking for ways to save, but this isn’t the item to bypass. It may cost you more upfront, but it could save you tremendously in the future if an issue with the ownership arises.