What is Title Insurance?
Title insurance protects against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Prior to a buyer’s purchase of a home, the property is likely to have gone through several ownership changes. In each instance of ownership, there may be issues that could cause problems to emerge with the property’s title, such as:
- Liens for unpaid taxes
- Mistakes in recording of legal documents
- Deeds executed under an invalid or expired power of attorney
- Deeds by persons of unsound mind
- Deeds by minors
- Undisclosed or missing heirs, including spouses
- Forged deeds, releases, or wills
When issues do arise, title insurance covers the insured party for any claims and legal fees that arise. If a home is being financed, the lender will require title insurance be purchased with protection in an amount equal to the unpaid loan. This is called a lender’s policy. Of course the value of the loan decreases over time as the balance is paid down and the property owner’s equity increases. To cover this equity, an owners policy is also available for an amount up to the purchase price of the home. Some owners policies will actually increase to cover appreciation of the home, up to a set limit. Though not required, buying an owner’s policy is highly advisable.
To check that a property qualifies for title insurance, a title company (usually the one performing the closing services) will do a title search. If the title is deemed clear, owners and lenders policies can be issued.