Title insurance is a type of indemnity insurance that is used to protect the holder in the event of financial loss due to flaws in a title to a property or invalidity of mortgage loans. Lender’s title insurance is one of the most common types of title insurance. This is purchased by the borrower to protect the lender. Sellers purchase owner’s title insurance separately, which protects the buyer’s equity in the property.
Unlike land registration processes in most countries, recorders of deed throughout the US typically do not guarantee indefeasible title to recorded titles. Title insurance guarantees protection against possible lawsuits targeting the title, or reimbursement for monetary loss equal to the dollar amount of insurance indicated in the policy.
The importance of title insurance
Title insurance serves as the real estate owner’s and lender’s protection against damage or loss incurred from defects in the title, encumbrances, liens, or actual ownership of the property. While traditional insurance protects against future events, title insurance protects against possible claims for incidents in the past.
Some of these claims include forgery or fraudulent title documents, property ownership by another party, outstanding lawsuits, liens against the property, unidentified easements, and others.
Acquiring title insurance
The insurance process is initiated by a closing or escrow agent once the property purchase agreement is completed. The attorney or agent typically recommends one of five major US title insurance underwriters.
Owners’ insurance and lenders’ insurance are the two kinds of title insurance available. Lenders usually require the purchase of a lender’s title insurance policy in order for them to have protection in the event that the seller fails to legally transfer the title of ownership rights. With a lender’s policy, lenders are only protected against loss. An issued policy typically represents the conclusion of a title search, which offers some assurance to the buyer.
An owner’s title insurance policy is usually required as additional protection, given the fact that title searches are not exactly “airtight,” and owners still face the risk of incurring loss. The owner’s title insurance, which is usually purchased by the seller in order to protect the buyer against possible flaws in the title, is optional.
In most cases, an owner’s policy and lender’s policy are both required to assure all parties are adequately protected. During closing, all parties purchase title insurance offered at a one-time fee. In order to prevent anyone from taking advantage, the Real Estate Settlement Procedures Act or RESPA prohibits sellers from requiring buyers to purchase from a chosen title insurance carrier.
What if I have no title insurance?
Without title insurance, transacting parties are widely exposed to significant risk, in case a title defect is discovered. Without title insurance, a homebuyer may have to deal with claims for back taxes, which rests solely on them. In this situation, a buyer not protected with title insurance will be required to pay the outstanding taxes, or they will lose the home to the taxing entity. In the same situation with title insurance, the buyer will be protected as long as they own the property.