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What is Title Insurance?

Updated: May 4

As a first-time homebuyer, you will encounter a need to purchase title insurance and may wonder: “What is Title Insurance?“ Here is a simple answer.



What is Title Insurance?


What is Title Insurance? – Quick Answer


Investopedia defines title insurance as an indemnity insurance protecting homebuyers and lenders from losing money if a defect in the title of the home appears.


Forbes describes title insurance as an insurance policy protecting property owners after the closing and for years later from claims against title (legal ownership). The policy protects against claims like a construction company never paid for work on the home by the prior owner.


A lender’s title insurance is the most common type. You, as the borrower, buy this title insurance to protect the lender.


Another type is the owner’s title insurance purchased by the seller to protect your buyer’s equity in the home.



KEY TAKEAWAYS


  • Title insurance protects buyers and lenders from losing money due to defects in the title to the home.


  • Most claims filed against a home’s title are conflicting wills, marital divorce conflicts, liens, and back taxes.


  • The title insurance fee includes a deep search into the title’s history to reveal claims arising from past occurrences.


  • Every real estate transaction requires a clear title ensuring the home is free from liens.


  • Title insurance policies cover many risks like incorrect ownership, flawed records, and false documents.




How to Understand Title Insurance



Clear title is required for all real estate transactions. Title companies search the title to see if any liens or other claims against the title exist.


The title search examines public records to conform or see the property’s legal ownership. Any claims filed with the public records that threaten clear title requires solving. Examples include:


  • Property boundary disputes;

  • Judicial court liens;

  • Unpaid property taxes; and

  • Unresolved building code violations.



Title insurance protects homebuyers and lenders against title defects, encumbrances, or liens. Typical claims include liens (from home equity loans, mortgage loans, and unpaid taxes). Also, ownership disputes from marital divorce or partnerships.


While typical insurance only protects against past events, title insurance protects against future claims based on past events.



Basic owner’s title insurance protects against these types of risks:



  • Another party claiming ownership;

  • The past owner’s spouse didn’t authorize the sale;

  • Conflicting wills affecting prior owner’s inheritance of the property;

  • Boundary disputes with your neighbor;

  • Fraud or forgery in important documents;

  • Encumbrances or court judgments against the property like liens and unpaid lawsuits;

  • Flawed public records;

  • Property survey errors;

  • Easements allowing strangers access to your property; and

  • Restrictive covenants (terms reducing enjoyment or value) like an unrecorded easement.



Let’s explore some of these legal terms in greater detail:


Easements involve someone else claiming prior rights to use your property. Examples include utility lines on your property allowing the utility company rights to access your property. Or, a neighbor’s property can only get accessed

through your property.


Encroachments where a neighbor’s property is partly inside yours.


Encumbrances include leasehold rights, restrictive covenants, and zoning laws limiting your property rights.


Liens allow contractors, lenders, or tax authorities to file a legal document with the County Recorder claiming unpaid debts by the previous owners.




Title Insurance Types



Two title insurance types are owner’s title insurance and lender’s title insurance.


Mortgage loans require the buyer to purchase title insurance to protect the lender. Such protections include a seller not legally able to transfer the ownership rights. The lender’s policy only protects the lender.


While a title search offers some assurance to buyers, they are not flawless. That’s why buying a homeowner’s title insurance policy protects you from defects in the seller’s title.




Buying Title Insurance


Buying Title Insurance

Four major U.S. title insurance underwriters exist:


  1. First American Title Insurance Company;

  2. Fidelity National Financial;

  3. Stewart Title Guaranty Company; and

  4. Old Republic National Title Insurance Company.



Also, some regional title insurance companies exist as well for you to choose as an option.


The owner’s title insurance costs vary by state, your new home’s purchase price and the insurance provider chosen. Most owners’ title insurance starts at $500 and up.


The federal Real Estate Settlement Procedures Act (RESPA) prohibits sellers from demanding buying from a specific title insurance company which prevents abuse.


Your Realtor can recommend a title insurance company to meet your needs. SoCal Lifestyle Realty provides experienced Realtors to help you with the home purchase process including title insurance options. Contact us to learn more about the many ways we help homebuyers.




No Title Insurance Risks



Many risks occur with not having title insurance. The risks include:


  • After closing you discover unpaid property taxes by the prior owner, you must pay them or face a foreclosure possibly losing your home;

  • Prior unpaid equity loans or lines of credit (HELOC) on the home become an after-title lien that the buyer must pay off;

  • Unrecorded access rights allowing strangers to pass through your property;

  • A former spouse or business partner of the owner file claims to the title of the property; or

  • You bought the home for cash “as is” or at a foreclosure sale taking on the prior owner’s property debts.


Buying a homeowner’s title insurance protects you against the above problems and more.




How Title Insurance Protects You ✔️



  • Your owner’s title insurance covers the costs of paying undiscovered liens;

  • Also, defending you against lawsuits by someone claiming rights to your property before you bought it;

  • It also provides you with cash settlements if you unknowingly bought the home with a forged deed from a crooked seller who didn’t own the home; and

  • Title insurance will also protect you during a future sale when a title search discovers problems with your title.



How Title Insurance Can’t Protect You ⚠️



Title insurance can’t protect you from every title problem. For instance, it won’t protect you from:


  • Eminent domain when a state or local government seizes private property for a public purpose;

  • Problems you created like failing to pay your roofer for repairs or not paying your property taxes resulting in new liens; or

  • New issues created after you bought the home like a marital divorce dividing your property with your ex-spouse.




Learn More About Buying a Home



Our blog posts educate buyers about the home purchasing process. For instance, we teach you about:




What is Title Insurance? – Conclusion


You just learned what is title insurance along with what it can and cannot protect.


To summarize, title insurance protects your new homeownership from past events that jeopardize your ownership rights.


Title insurance companies conduct a title search of the public records to see if the seller has a clear title. Also, researches if any easements, liens, or encumbrances exist before you complete your purchase.


Two types of title insurance exist, lenders and owners. The title search during the processing of a lender’s title insurance may discover problems with the seller’s ability to sell or unpaid liens.


Yet, other unknown problems may come up after your ownership that the lender’s policy can’t help you. That’s why you may need owner’s title insurance.




Want to Buy a Home in San Diego County? 🤔


SoCal Lifestyle Realty offers you experienced Realtors to help you with the entire seeking, negotiating, signing a purchase contract, finding a lender, and closing process.


We even use the unique RealScout that searches the San Diego County MLS listings based on your preferences for a new home. This saves you time by quickly identifying the best home fulfilling your desires.


Contact us to learn how our RealScout program makes looking for a home easier and faster. Our Realtors can help you in many ways to find and move into your dream home.




Steven Rich, MBA – Guest Blogger



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