What is Title Insurance?
Title insurance is an essential part of almost every real estate transaction, yet many do not understand what title insurance is, who it protects, and why title insurance is necessary.
Protecting Your Largest Single Investment
The purchase of a home is an expensive and important purchase. The purchaser and purchaser’s lender want to make sure that no individual or government entity has a right, lien, or other claim to the property. Title insurance policies protect against any such adverse rights or claims. This insurance ensures that an owner of a property has clear and marketable title to a property.
Unlike other insurances, which protect against the risk of events in the future, title insurance exists to protect against losses from title issues or defects which occur as a result of things that happened in the past. Even the most thorough title search will not reveal everything that may cloud title to a property. Title insurance protections include, but are not limited to:
Errors in the public record
Fraud or forged documents
Undisclosed heirs; and
Adverse possession.
The title examiner is not liable for things not found in the land records during a title search, but a title insurance policy will protect the insured party from any financial loss by paying for the costs of any legal defense and/or monetary claim.
Why is Title Insurance Important?
Before issuing a policy, Modern Settlements will exam of the public records; during this process, any title problems are usually found and cleared up prior to the purchase of the property. However, there is always the risk that something is missed and just because a title search was performed does not mean potential title problems cannot arise in the future. Without title insurance, a homeowner could be faced with significant costs, legal fees, and even the loss of the home. A buyer’s lender understands that purchasing real estate never comes without risk and so as a condition for obtaining a loan, the lender will require the borrower to purchase a lender’s title insurance policy. Unfortunately, this only provides coverage to the lender in the event of a title defect. An owner’s title insurance policy specifically protects the buyer’s investment.
Who is Protected?
Both the mortgage lender and the property owner have an interest in clear title to the property, and separate title insurance policies are available to protect those respective interests. If the purchaser is financing any portion of the purchase price, a lender will generally require that a Lender’s Title Insurance Policy is issued to insure the lender up to the loan amount. Though this policy protects the lender, the purchaser pays the premium at settlement as one of the costs of obtaining the loan. It is important to note that a lender’s title insurance policy is loan-specific. Therefore, if an owner refinances an existing mortgage loan with a new loan, even if it is with the same lender, the owner will have to pay for a new lender’s title insurance policy.
For the property owner to be protected, the purchaser must purchase a separate Owner’s Title Insurance Policy which protects the owner of the property up to the face value of the policy (typically the purchase price). While a purchaser is not required to buy an owner’s policy, it is highly recommended that one be purchased. For the cost of a one-time premium payable at the time of settlement, the owner’s equity and investment in such an important asset is protected.
Once a title policy is issued, if for some reason any claim which is covered under the title policy is ever filed against the property, the title insurance company will pay the legal fees involved in defense of the owner’s rights, as well as any covered loss arising from a valid claim.
How Much is a Title Insurance Policy?
There are two different types of owner’s title insurance policies that a title company offers. In the DC Metropolitan area, the policy purchased most often by home buyers—and the one often quoted by the lender—is the Enhanced Policy. Enhanced title insurance policies provide added protections by increasing the policy limits over time in recognition of increasing property values, mechanic’s lien coverage, and defense against some post-policy events (e.g. permit violations, encroachments, and transfers into a trust).