Imagine this scenario: After a long search, you have finally found the home of your dreams. Negotiations are made, your offer is accepted, title work is handled, and the settlement was successful. You did it. You now own your dream property.
A couple of years down the road, you and your family have started making memories in the home and plans for the future. That is, of course, until a piece of certified mail makes it into your mailbox. An unknown heir is claiming ownership rights to your property. The very home you own - and pay for.
Sometime during the journey through the title process, you were asked if you’d like to purchase a title insurance policy. What did you say? Your answer will have a direct impact on how the situation is handled and likely play a role in your future.
Scenarios like this happen more often than you’d expect.
What is Title Insurance?
Title insurance is issued after the completion of a title search and protects property owners and lenders against losses that may occur due to defects in the title of a property. A few of the most common title defects that arise are:
Liens
Judgments
Outstanding taxes
Lawsuits
Bankruptcies
Unknown heirs
Forged signatures
Fraudulent transactions
Easements
Encroachments
Missing wills
With a title insurance policy, many issues that come up now or in the future will be handled for you so you don’t end up with a financial loss. Without it, you will be left fighting long, expensive battles that may end up in the courtroom. What’s worse? You may lose! This could cost you your home.
There are two main types of title insurance, including an owner’s policy and a lender’s policy. An owner’s policy protects you (as the owner) for as long as you have an interest in the property. If title issues arise, your insurance is designed to provide peace of mind and financial protection by mitigating the risk of these issues.
A lender’s policy looks out for the lender. They want to be protected in case title issues arise and this gives them that security.
Many title companies encourage buyers to invest in both types of title insurance so that everyone is guarded from title defects.
Do I Need Title Insurance?
Despite the comfort and security that a title insurance policy can provide, it is not uncommon for buyers to question whether or not they need title insurance. After all, it is just one more expense in a long line of closing costs.
And while you may not be required to purchase an owner’s title insurance policy, it does come highly recommended by everyone in the industry. Not because they’d like to get the funds from your premium, but because they have seen what catastrophes can happen to those who elect to forego the added expense.
Let’s take a look at a couple of common scenarios and determine whether or not you need title insurance. Ready? Let’s go.
Do I need title insurance if I am securing a mortgage? If you are taking out a mortgage on the property, there is a good chance that the lender may require you to take out a lender’s title insurance policy. They are taking a risk when they provide you with the money to make the purchase and they want to ensure they get their money back. This type of title insurance policy will protect them for the value of the loan - but it will not protect you. Typically the premium difference between a lender’s and owner’s title insurance policy is minimal.
Do I need title insurance if I am paying cash for the property? If you are paying cash for your property, you will still want to consider an owner’s title insurance policy. Handing over a large sum of money for real estate may get the title transferred into your name, but it will not override any title issues that may have been there before you took ownership. An owner’s title policy will safeguard you from any prior issues that may pop up later.
Do I need title insurance if I am refinancing my property? Believe it or not, you will likely need to purchase a new lender’s title insurance policy. The reason for this is because a lender’s policy is attached to the specific loan. In a refi, you are satisfying one mortgage and taking out a new loan. Your lender will likely require a new policy to protect the new loan.
Do I need title insurance if I am buying a new construction property? Absolutely. Just because you are going to be the first owner of the structure built on the property doesn’t mean the property itself is new. It has likely been passed through many transfers over the years - and this could leave you susceptible to title woes. Don’t risk it.
Do I need title insurance if I am buying vacant land? Of course. Just like the new construction above, the land may have changed hands over the years. It is best to protect yourself with a title search and a title insurance policy.
The title experts at Buchanan Settlement Services make sure their clients are informed about title insurance and answer any questions along the way. To learn more or to get started, contact us today at (717) 762-1415.
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