Title Insurance

What is It and Who Does it Protect?

    Especially if you are buying your first home, you may not be aware of all the many facets involved in getting a home and the mortgage that normally comes with a home.This report will give you some important information on one of the less obvious facets -- title insurance.

    First, let's be clear," says one Sarasota florida realtor, "if you are going to need a mortgage to buy your home, whether its a first home or not, either you'll buy lender's title insurance (among other requirements) or you won't get the mortgage loan." OK, so you buy lender's title insurance, but what is it and who does it protect ?

    When you buy a home, you (and the mortgage firm) want to be absolutely assured that the party selling you the home actually has full and legal title to it. The party who conducts your closing will check this out in the property records office in the town where your new home is located by researching the history of ownership of the property.

    But, and here's the tricky part, those records down at the property office may be official, but they may also be wrong or missing some important information that just never got properly recorded.  It's also possible that the person doing the title search simply made a mistake and missed something important in a rush to complete several title searches in one visit.

    For instance, Does a contractor who worked on the home many years ago still have an outstanding "mechanics lien" against the property ? Or, are there outstanding property taxes or homeowner association fees that weren't ever paid which resulted in a lien against the property and they were missed in the review of local property records. Or suppose that 65 years ago the property you want to buy was owned by a Mr. Jones who secretly had more than one wife. That is not likely to ever show up on local property records. Does the second Mrs. Jones still have an unsatisfied claim against the property?  Maybe yes; maybe no, but that will only be cleared up after a costly legal process.  And if you were to lose the legal contest, you could lose the home you so happily bought.

    There can be even more bizarre claims. Was one of the previous owners legally insane at the time he or she sold the home ? Any such claim can result in there being "a cloud on the title."  Neither your lender nor you want any "clouds" on your ownership.

    The most common form of title insurance is "lenders" coverage. As you might imagine, it protects your lender in case of title problems. As mentioned before, generally you are going to be required to buy "lenders title insurance" to protect your lender up to the amount of your mortgage. If you buy a home for $240,000 with a $200,000 mortgage, you'll be required to buy a $200,000 lender's policy. If there is ever a claim against your home, the title insurance company will fight on behalf of the mortgage firm to protect "their interest." If there's a valid claim, the lenders policy will pay off the balance of the mortgage amount, and indirectly, you will have been protected at least in part.

    This is good news, in a way, because you won't owe your lender anything if you were to lose in court. But what about your $40,000 down payment in the above example. Your $40,000 down payment isn't covered by the "lender's policy." It only protects the lender's interests.

    You should seriously consider purchasing an "owner's title insurance policy" which will protect your ownership share of the home In some states, you can also buy an "inflation rider" for your owner's policy. With that, as the value of your home goes up with inflation, so does the value of your owners title insurance coverage.

    Lenders title insurance is important and you're going to get it whether you want it or not if you get a mortgage for your home. But remember, an extra measure of protection comes when you also buy an "owners title insurance policy". The small extra investment may buy you a lot of peace of mind.