Do You Need Title Insurance?

All your hard work has paid off. You just found your dream house. Maybe you even got a deal on it, or maybe you had to offer 20% over list price. Still, it's your dream home and you'll figure out a way to come up with the 20%.

Maybe you could start by cutting out the expense of that thing called "title insurance." After all, the house is in the city and it's had the same owner for the last 40 years. How could there be any problems with the title?

This article explains what home buyers need to know about title insurance — and whether you need it:

• What Is "Title?"
• How Does a Title Search Help?
• What Is "Title Insurance?"
• How Do I Get Title Insurance?
• What Title Problems Can Arise?
• Title Insurance Coverage and Claims
• Types of Title Insurance Policies
• Facing a Title Claim? Talk to a Real Estate Lawyer.

What Is "Title"?

When you buy a new home, you are given title. That is, you are given the right to own and use the property as defined in the title document. The title may be in your name, or you may hold it with another person as "joint tenants" or as tenants in common. You may have a right of survivorship, or there might be a life estate in the home.

How Does a Title Search Help?

You may not be the only person or entity with rights to your home.

• The bank that holds your mortgage has an interest in the property
• A contractor who worked on your house and properly filed a mechanic's lien against it has an interest
• The city may have an easement giving it the right to string utility lines across the front yard
• The county may have a lien against your property for unpaid taxes
• A company may own mineral rights on part of the property.

Doing a title search before a home purchase will reveal these other interests and may reveal potential problems.

A title search is done by examining public records to look up the history of property ownership. You can do your own title search, assuming you know what to look for. But if you are planning to get a loan to enable you to purchase the property, the lender will require that a qualified third party do the title search.

The title search shows not only limitations on the use of the property and rights others may have in the property, but also any encumbrances like liens or monetary obligations that are outstanding against the property.

What Is Title Insurance?

Most people are familiar with other types of insurance that cover events that have not yet happened — auto liability insurance, medical insurance, and life insurance are examples of such policies. Usually, these policies exclude events that occur before the date the policy is issued. In other words, you cannot get life insurance on someone who has already died, and you will not find an insurance company willing to give you insurance coverage for a car accident that has already occurred.

Title insurance, on the other hand, covers events relating to the title that have already happened. It does not cover anything that happens to the title after the date of issuance. So, for instance, if you have a lien filed against your property for taxes you didn't pay, your title insurance policy is not going to help you. But, if the lien is for taxes not paid by someone who owned the house 80 years ago, then you may have coverage under your title insurance policy.

How Do I Get Title Insurance?

The title search and title insurance policy are part of the process of purchasing a home and getting a mortgage. You will be offered the option of purchasing title insurance.

Before offering to issue a title insurance policy, a title company will do a title search to learn whether there are any problems or limitations with the title. This search is done to minimize the risks of offering insurance. That way the title insurance company is able to offer its insurance policies for a relatively low, one-time fee.

What Title Problems Can Arise?

Problems such as incorrect names in deeds, wills, or trusts, outstanding mortgages, title defects, judgments and tax liens, easements, and incorrect notary acknowledgments are generally found during the title search process and can potentially be cleared up before closing on the property.

If these problems are not cleared, they will often be listed as exceptions to the policy's coverage. This means the title insurance company will not protect you against claims or lawsuits that may arise from these problems.

Perhaps you are wondering what the point of title insurance is if the title company won't cover known problems with the title. Isn't it like buying medical insurance that won't cover you if you get ill?

The answer is "not really," for two reasons. First, as a buyer, once you know of the problems with the title and exceptions with the insurance, you can then decide whether the property is still something you want to purchase. And second, there can many problems with a title that even a diligent and trained eye may not uncover during a title search, problems that will only become known later. These will be covered.

Fraud and Criminal Actions

Fraudulent acts by prior owners such as:

• Forged documents that transfer no title to the real estate
• Forged mortgages or forged satisfactions or releases of mortgages
• Impersonation of the true owners of the land by fraudulent persons
• Instruments executed under expired or fabricated powers of attorney

The deed may have been executed by someone who failed to get legally divorced before they remarried, who forgot they were divorced when they inherited the property as the surviving spouse, or who already sold the property to another purchaser who is now in possession of the property.

Legal Problems

• Defective acknowledgment due to lack of authority of notary

• Execution of the deed by someone who is minor or otherwise not competent
• Invalid, suppressed, undisclosed, and/or incorrect interpretation of a will
• Previously undisclosed heirs with claims to the property

Procedural Problems

• Mistakes in public records or mistakes in recording the legal documents, such as incorrect indexing, errors, and omissions in transcribing due to similarity in names, and failure to preserve original instruments
• Descriptions of the property that appear to be, but are not, adequate

• Erroneous location of a critical aspect of the real estate, such as an ancient pipe or sewer line, which does not follow the route of a granted easement
• Tax titles that are invalid because of irregularity in the proceeding
• Liens for unpaid estate, inheritance, income or gift taxes and/or special assessments which become liens

Another problem could be that you have acquired a perfectly good title to a piece of landlocked property for which there is no legal access.

Title Insurance Coverage and Claims

Although the events that cause these types of problems happened before you purchased the property, a good title insurance policy will provide coverage for the consequences of these events as they affect your ownership of the property.

How Does Title Insurance Work?

In the event that there is a claim against your rights of ownership of the property, your title insurance company will cover the cost and fees associated with defending against the title claim. The policy will also cover, up to the face amount, any loss of title or the cost of perfecting the title. Without title insurance, you may be faced with huge legal fees and costs and even the loss of all or a portion of your dream home.

Types of Title Insurance Policies

There are two types of policies available: a lender's policy and an owner's policy.

Lender's Policy

Your lender will probably require that you obtain a lender's policy because their loan was made with the property as security. Any defect in the title of the property affects the value of the lender's security. The lender's policy only covers the amount of the loan. As you pay back the loan, the value of the lender's policy decreases.

Owner's Policy

Your equity in the property is not covered by the lender's policy. As time goes by and you pay back your loan, your exposure increases unless you have an owner's policy, which covers the total amount of the value of the property at the time the property is purchased.

The cost of an owner's policy is relatively low since the increase in the risk for the title insurer is not much greater than if it only insured the lender's interest. Since your interest, unlike the interest of the lender, may increase over time, you may want to consider purchasing an inflation rider that will adjust your amount of coverage to reflect the increase in the value of your property over time.

Facing a Title Claim? Talk to a Real Estate Lawyer

One way to help ensure that you actually hold ownership of a property is to insure the title. Without it, the cost of defending a title claim would be quite high. In order to improve your chances against such claims, you should consider working with a real estate attorney experienced in such actions.