Title insurance is one of the many hidden costs when purchasing a property. The title must be insured and policy regulations are managed at the state level. Title insurance is a requirement for most property requirements. The title insurance must be purchased at the same time the transaction is conducted. Here is an overview of title insurance and how it works.

What is title insurance?

Title insurance protects the owner and lender from financial loss. The real property can come with a range of defects that may be discovered well after the property was purchased. The coverage is considered to be a form of an indemnity policy. The coverage protects the mortgage loan and the property owner’s rights to the real property. The policy expires when the home is officially paid off.

Why do you need title insurance?

A person can buy a property and conduct business as the owner of the property. Years after purchasing the property, it may be discovered that the title was defective. As a result, the property owner can be subject to lawsuits and claims. With a policy in place, the title rights cannot be challenged, which could subject the owner to financial losses. Once the title is thoroughly examined, the chain of the title may be found to have liens, easements, encumbrances and outstanding property taxes. Financial compensation is awarded to the policy holder if there are any new defects discovered when researching a title of a property. Should the asset be devalued as a result of a claim made against the property, the owner receives compensation because the defect is covered. 

Title insurance features

Title insurance comes with a range of protections. It offers protections if the owner has interest in the title. If there are liens or easements, the property’s title is also protected under such a policy. Any defects discovered at a later time are covered as part of the policy. Any claims stemming from fraudulent incidents such as duress, fraud, forgery or impersonation are also covered under the policy. Violations including permitting and zoning challenges are also protected.

Basic protections

• Compensation for tax and creditor liens
• Legal and litigation costs
• Title search
• Losses associated with improper property transfers

When do you need title insurance?

You are required to purchase a new policy in most real property transactions. If you are refinancing a mortgage, you may be instructed to take out a new title insurance policy. The lender is protected for whatever is owed at the time the real property is refinanced. If buying a new property, you will be required to purchase coverage by the lender. 

Are there different types of title insurance?

There are two different types of title insurance policies. There are lender and owner policies. Both provide protections for potential claims and financial losses should an issue arise later after the purchase of the property.

The owner’s version of title insurance protects the property owner if there are any losses or damages. If the property has a lien on it, the policy protects the owner. If it is discovered that the property is not accessible, then the owner is compensated. If the property is found to be owned by someone else, the policy will be used to cover any future losses. The policy covers every form of potential loss that could be suffered by the property owner that isn’t named as an exception. The title coverage also protects the owner’s right to sell the property. It also guarantees access to the land. 

The lender policy is different in that is must be first approved by the American Land Title Association. Available exclusively to lenders, the policy covers the value of the mortgage. If there were any creditor liens against the property, the policy would cover any potential financial losses if the creditor’s interests superseded those of the lender. The policy also provides coverage for losses outlined in the owner’s policy. In the case of undisclosed second mortgages or any cases where the lender is exposed to financial risks, the lender is protected from any loss.

A title insurance policy can be taken out for an owner or a borrower. The policy remains in place until the mortgage is completely paid off. The terms change if the property is sold. If the property is ever sold, a new title insurance policy must be taken out.