If you’re a first time home buyer, the whole process from start to finish can be very confusing. You’re hit with a bunch of terms from your Mortgage Officer, Real Estate Agent and Closing Attorney that will be completely strange to you. One of theses terms is Title Insurance. If you’ve never bought a house before, more than likely you don’t know what it is or if you need it.
You actually do need it, but before I get into that, let me explain to you what it is and why it’s important. When you buy a home, you want to make sure that the sellers actually have full and legal title to the property. Your Closing Attorney or Title Company (whomever you have doing your side of the closing) will make a trip to the city records office to research the title history to make sure there are no breaks in the chain of title to ensure the title is good.
This is an important part of the pre-closing routine, but there can be and sometimes are glitches in the process. Although the city records are official, they may be wrong or the person conducting the research may have made a mistake or overlooked something. If you buy a home, did not purchase title insurance at closing and after you close someone comes along and can prove some form of legal ownership, you stand to lose the house and still owe the mortgage company what’s due them.
Also, let’s say that the owner that you bought the house from had put a new roof on the house prior to placing it for sale on the market and made an agreement with the contractor to pay him from the proceeds of the sale when the house sold. If the previous owner did not pay the contractor as promised, then the contractor can legally place a lien on the property after you have moved in and the debt now becomes your burden. In this case you would need to consult an attorney to see what legal options you have concerning the lien.
There are other issues as well that may “cloud” the title, that if missed could come back to haunt you. What if there was a couple previously living there that went through a divorce and one of the two still had some legal ownership in the property. This could happen if the proper paperwork was not filed at the time of the divorce.
These are the reasons you need to purchase Title Insurance at the time of closing. There are two types of Title Insurance. One, Lender’s Title Insurance, (the lender will require you purchase this as a provision to the loan). It covers the lender’s claim on the property. If there is a claim the insurer will fight on your and the mortgage companies behalf and if needed, the policy will pay off the mortgage. This is good news for you since you won’t owe the lender a dime if you lose in court.
The other type is Owner’s Title Insurance. This is often not required by the lender as it protects your equity in the property, not the lender’s. If you purchased a home for $300,000 and made a down payment of $25,000, the Owner’s Insurance will pay you that difference. You can often also get an “inflation rider” with the policy so that as the value of your home increases, so does the value of your coverage.
Now, as a professional Real Estate Agent, I will always recommend that you, the buyer, buy the Owner’s Title Insurance. It’s a one time fee and it covers you for life. The costs vary so ask your Closing Attorney or Title Company representative what the fees are and if you have any options as to who the insurance can be provided by. The small cost up front for the insurance, far outweighs the costly consequences that could conceivable greet you down the road!