Ins and outs
of title insurance
There's another kind of insurance you buy when you
buy a house or refinance: title insurance. It's an unusual kind
of policy because it protects against something that might have
happened in the past, rather than something that might happen in
Title defects aren't common, but when they occur,
the consequences can be disastrous.
Title insurance protects the lender or owner from
disputes over ownership of property. When you buy real estate, someone
checks land ownership records to find out if the seller has the
right to sell it and collect the full payment.
Perhaps the seller is divorced and needs the ex-spouse
to sign a document allowing the sale to go through. Or maybe an
unpaid electrician put a mechanic's lien on the property, ensuring
payment when the property is sold. The county might have filed a
lien to satisfy unpaid taxes. And, of course, the mortgage lender
has a lien on the property, ensuring that the loan is repaid before
the sales proceeds go to anyone else.
One seller found out to his surprise that there
was a "cloud" (title defect) affecting title to his property.
The title search on his property showed that a deed had been recorded
transferring title from the previous owner to himself. But that
deed was signed by only one of the two owners.
Due to an oversight, the wife's signature wasn't on
the deed. This meant that the wife could still make a claim to the
property. In effect, she was still in title as an owner because
she hadn't transferred her interest in the property.
A good title
Your real estate purchase contract should include
a clause that requires the sellers to provide you with good or marketable
title to the property at closing. If the sellers are unable to do
this, you should be able to withdraw from the contract without penalty.
In the example above, the buyer's title insurance
company was able to track down the wife's heirs and get the signatures
necessary to remove the cloud on the title. The defect in the title
report was corrected and the sale went through.
Most buyers take out a mortgage when they purchase
a home. But before a lender will issue a mortgage, there will need
to be evidence that the buyers will receive good title to the property.
Also, the lender will require that a title insurance policy be purchased,
usually at the buyer's expense, guaranteeing the lender's interest
in the property.
Title insurance is paid for on a one-time-only basis.
It is not transferable from one party to another.
Tip for first-timers
A lender's policy of title insurance won't protect
the buyers' interest, but buyers can get title insurance for their
own protection. Even if you're paying all cash for a property, and
won't need a mortgage, it's wise to obtain a title insurance policy
to protect yourself. Title insurance for the buyer can be paid for
by either the buyer or seller. Who pays is often determined by local
custom. The cost is based on the purchase price: the higher the
price, the higher the title insurance premium.
Searching the records
Before issuing a policy of title insurance, title
examiners search the public records for records that affect the
property in question: such as liens, judgments and easements. An
easement grants the right to use another person's property for a
The title search is designed to dig up all of these
things and more. Later, if there is a dispute and a lawsuit over
ownership of the property because the title search was faulty, the
title insurer pays legal fees and any settlement amount. When you
pay for title insurance, you're paying for two things: the title
search and the insurance policy that pays the costs of future legal
There are two kinds of title policies when you buy
a house. One covers the lender (you have to pay) and the other covers
you, the buyer. You'll always be required to get the former, and
it's often a good idea to buy the latter.
Make sure you understand the kind of title insurance
you're buying, for there are several kinds available. If you have
a question about anything in your title search, ask your title insurer
or attorney for an explanation before you close.