How Title Insurance Works
An owner’s title insurance policy can cover the costs of paying off a previously undiscovered lien or defending against a lawsuit filed against you by someone claiming a right to the property. It can also provide a cash settlement to a new owner who unwittingly purchases a property with a forged deed from a fraudulent seller who did not actually own the home. Further, the owner’s title insurance protects your ability to sell the home one day if a problem turns up during a later title search.
That said, title insurance doesn’t protect homeowners against all possible infringements on their property rights. For example, it doesn’t protect you against title problems caused by your own actions, such as failing to pay the company that replaced your roof or failing to pay your property taxes. It also doesn’t protect against eminent domain, which is when a government seizes private property for an ostensibly public purpose.
In short, it doesn’t protect against issues newly created after you buy the property. It protects against issues that might have affected your decision to purchase the property had you known about them at the time.
You’re probably less concerned about how a lender’s policy works since it doesn’t protect you. But you might still be curious since you’re being asked to pay for it.
Let’s say you lose your home because it turns out the property was sold to you fraudulently. You’re not going to keep paying the mortgage. The lender will then file a claim with its commercial title insurance company to recoup the mortgage payments it was expecting to get from you.
Under other circumstances where you stopped paying your mortgage, the lender could foreclose and recoup its losses from selling the home. But if it turns out that someone else has a right to the home, foreclosure isn’t an option.
You can check out the industry-standard forms used for owner’s and lender’s policies at the Aqutitle website.
Is Title Insurance Required?
Lender’s title insurance is required, but owner’s title insurance is optional. An owner’s policy can protect you against losing your equity and your right to live in the home if a claim arises after purchase. Even if you’re buying a new home, defects can exist because the land has had previous owners and the builder might not have paid all its contractors.
These are some of the issues an owner’s title policy can protect you against:
- Property survey errors
- Boundary disputes
- Errors on the property deed
- Building code violations by a previous owner
- Conflicting wills
- Claims by an ex-spouse who didn’t authorize the sale
- Claims related to a forged power of attorney
- Liens from contractors, taxing entities, or previous lenders
- A former owner’s unpaid child support
- Improperly recorded documents
As with many other types of insurance, an owner’s title insurance policy can feel like a waste of money if you never need to use it. But it’s a small price to pay to protect your interests in case anyone challenges your title after you close on your home.