Do I Need Title Insurance

When you buy a new home, you are flooded with options and things that you are told you need to purchase.  One common question that comes up in almost every real estate transaction is “Should I Purchase Title Insurance”?  Many people don’t have a clear understanding of exactly what title insurance is, much less if it is worth the extra cost in purchasing a home.  We will attempt to enlighten you on exactly what title insurance is, what it covers and some of the misconceptions of title insurance and finally, if you should purchase it when buying a new home.

What is Title Insurance?

All properties that get sold have a title.  That title shows ownership and transfers to the new owner when a home is sold.  The title is generally filed in the local clerk of court as public record.  Anytime a home is sold, to be able to verify that the seller is truly the seller, a title search is completed.   Once the seller is verified, the home can be sold to the new buyer of the property.  A “cloud on the title” means that something was found in the title search that may not let the property be transferred.  An example of a cloud on the title would be that 30 years ago, the then owner passed away and left the property to his or her children.  Let’s then say that the home was then sold by the children that inherited the property.  What if it was found that the now deceased previous owner had another child that was not known at the time and had legal inherited a portion of that property…but the property was sold already!  That would then mean that every sale of the property from then on out was not legal.  The costs for correcting something like that can be monstrous and that is where title insurance comes in.  Title insurance is simply a policy provided that says if at a later date, the title is found to not be clear (and you now own the home) they will pay the costs to rectify the situation.

Two Types of Title Insurance

There are two types of title insurance policies.  There is an owner’s title insurance policy and the lenders title insurance policy (sometimes called a loan policy).  If you have financed your home, your lender will require you to purchase a lender title insurance policy.  Just as the lender requires you to have insurance on the home in case it was to be burned down in a fire, they also require you to insure you have clear title.  One important factor in a lenders title policy is that it only covers THEM in the instance where your title has been found to have an issue----you could still be left with a major legal issue on the validity of owning your home.  A Sellers Title Insurance policy, on the other hand, insures that YOU are protected in the same manor.  A seller’s policy also covers any losses and damages suffered if the title is unmarketable for future sale. Because a Sellers Title Policy covers you and only you…no one is forcing you to purchase it.  It’s important to know that the two policies are usually independent but still cover the same home.

Where Can I Purchase Title Insurance?

Title Insurance is usually obtained from the closing company (sometimes called Escrow Company or closing attorney), but as the buyer of the home, you have the option of choosing to purchase your policy from anyone you choose.  A federal law called the Real Estate Settlement Procedures Act (RESPA) entitles the individual homeowner to choose the title insurance company.  RESPA makes it illegal for any bank, mortgage broker, or attorney to mandate that a particular title insurance company be used. Doing so is a violation of federal law and any person or business doing so can be fined or lose their license.  There are only a handful of title insurance underwriters in the United States.  This illustrates the largest title insurance providers in the country and their respective market share:

 Should I Purchase an Owners Title Policy?

In most instances it is recommended that you purchase an owners title policy.  Needless to say, there are some home purchases in which the buyer is short on cash and attempting to save every penny in the purchase of their new home and this is optional.  In some instances, a good real estate agent can potentially give you some insight on if a particular area or development is known to have title issues.  That in no way will insure that your title is clear, but the best real estate agents will generally be aware of real estate developments or subdivisions that have historically had some title challenges.  They may even discuss this with you early on in the home buying process.

Conclusion

 At the end of the day, title insurance can prevent you from a catastrophic financial situation if your new home is found to have a title issue after you have purchased it.  It can keep you from even selling your home in the future!  We understand that in some instances, you may try to save every dime when you a buying a house, but although it is optional, an owners title policy should be one of the expenses that you figure for as part of your closing costs.