What is Title Insurance and Why Do I Need It?

Two questions that I am often asked are, “What is title insurance?” which is usually followed by the question, “Do I need title insurance?”

These questions usually get asked when I present the seller with a “net proceeds” sheet which has a spot for the title insurance fee, which is likely one of the largest on the sheet.

Title Insurance, in its simplest terms, is an insurance policy the seller purchases (identify your local trend here) which verifies that the seller has the sole interest in the property, has the ability to sell it, and identifies other potential issues such as easements (the ability for a third party to access the property). Usually the property history is pulled and evaluated by Title Examiners to make sure there are no potential issues. According to homeclosing101.org (provided by the American Land Title Association), more than one-third of all title searches result in a title problem, but most are easily fixed before closing without the buyer or seller getting involved.

If issues do arise, Title Examiners and their teams do their best to try to solve these items if a solution is possible, or determine potential solutions which require action from others to solve. For example, items such as unpaid taxes, mortgages, child support, and other liens may have been placed on the property by others and represent debts that need to be satisfied before the property can change hands. It is possible the property is part of an estate in which there is a dispute among the heirs. Or a builder may have failed to pay a contractor for work and the contractor may have put a lien on the property. If these liens are not satisfied before a property closes and changes hands, it becomes the responsibility of the buyer to solve or pay (as the lien follows the property, not necessarily the seller). This is why taking the extra precaution of having insurance is so necessary and, in fact, most lenders require it to protect their financial interest in the property.

Buyers may have the option of purchasing an “Owner’s Policy” when their transaction closes which protects the buyer from potential issues which were not identified by the Title Examiner during the transaction. Mortgage companies require this insurance so if you’re getting a loan you will need to purchase it. This insurance policy will provide the funds needed to defend the property title in court and even provide funds for settlement if need be. This policy is paid once at closing and protects the buyer and heirs.