Title insurance protects individuals from potential losses that may arise after a real estate purchase. The losses title insurance protects against include liens, defects, or other encumbrances that may exist on the property, such as unpaid property taxes or fraud in the creation of a deed. Title insurance ensures the buyer that the seller of real estate has clear title, or provides compensation to the buyer if there are unknown or hidden defects or clouds on the title. Typically, you apply for title insurance through the escrow or closing agent. The agent’s job is to identify any defects on the title that should be corrected. The agent does this by researching public records including mortgages, deeds, wills, divorce decrees, tax records, and liens.
Types of title insurance
There are two types of title insurance available: the owner’s policy, which protects the buyer’s interest, and the loan policy, which protects the lender’s interest.
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The owner’s policy protects the homeowner from the risks listed in the policy if an individual sues, asserting that the person who sold the house did not have the right to do so. When you purchase a home and receive a deed showing that the previous owner transferred ownership to you, you expect to receive clear title. A policy of title insurance will protect the buyer from all potential contingencies that could compromise free and clear ownership. Some common examples include:
- Purchasing property from a supposedly single person whose divorce is not yet final.
- Purchasing property from someone who received the real estate under the terms of an invalid will.
- Purchasing property that is inaccurately or incompletely described in the sale documents.
- Purchasing property for which some of the documents have been forged.
- Purchasing property that is subject to a tax lien, a contractor’s lien or child support/spousal support liens.
The loan policy works to protect the lender’s interest until the borrower pays off the mortgage. When you purchase a home and receive money from a lender, the lender gets insurance that secures their interest in the value of the property. This policy minimizes the risk associated with lending money for the purchase of real property. It assures the lender that the title to the property was properly researched and filed. This protects the lender should the buyer fail to make the correct payments on the mortgage. The protection of this policy thus extends beyond just title transfer.
What title insurance does not cover
It is important to understand what the title insurance does not cover so you can protect yourself with other legal remedies. Title insurance does not insure against fire, flood, theft, or other types of property damage or loss that may be covered by homeowner insurance. Title insurance generally does not offer protection in the event of a boundary dispute, or if the policyholder’s spouse asserts rights to the property on grounds of homestead, community property, or joint tenancy survivorship. Finally, the policy will not cover defects created after the policy is created, defects you create, or problems that may arise due to failure to pay your mortgage.
Last updated December 28, 2018
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