What is Title Insurance?
Title insurance provides protection against financial loss arising from issues related to the title of a property. Before purchasing a home, the property may have undergone several ownership changes, and the land itself may have a complex history. Problems can arise from this history, such as forged signatures during title transfers, unpaid real estate taxes, or other liens. Title insurance covers the insured party for any claims and legal fees that arise from such issues.
Prior to closing, public records are searched to determine the property's previous ownership and any related dealings. Buyers expect a property to be free and clear of claims at closing, and any issues typically need to be resolved beforehand.
Sometimes, title problems are not discovered until after closing, which can affect the property's marketability and potentially incur costs for the buyer. For instance, if a survey fails to show that an addition was built without permission, the buyer may have to remove it at their own expense.
Am I required to purchase Title Insurance?
Title insurance is mandatory if you require a mortgage, as all mortgage lenders require this protection for an amount equal to the loan. The coverage lasts until the loan is repaid. Although it primarily protects the lender, the borrower pays a one-time premium upfront at closing.
Who is protected with Title Insurance?
Title insurance policies can be issued for the purchaser (for new or resale homes, condos, and vacation properties), the lender, or both. Common risks covered under a title insurance policy include:
- Survey irregularities
- Forced removal of existing structures
- Claims due to fraud, forgery, or duress
- Unregistered easements and rights-of-way
- Lack of access to the property
- Work orders
- Zoning and setback non-compliance
For a risk to be covered, it typically must exist as of the date of the policy. However, certain risks, such as native land claims and environmental hazards, are usually excluded. It's essential to discuss covered and excluded risks with your lawyer.
When does the insurance coverage end?
When covering the purchaser, title insurance remains effective as long as the insured retains an interest in the property. Some policies also extend protection to heirs or family members who inherit the property.
For lenders, coverage lasts as long as the mortgage remains on title. If a lender realizes its security and suffers a loss due to a covered risk, they are protected up to the principal amount of the mortgage.
The premium for title insurance is typically paid once at the time of purchase, with the buyer usually responsible for the cost. Some policies may automatically cover both the purchaser and lender, while others may charge a small additional fee for dual coverage.
Protection and Peace of Mind
Title insurance helps prevent delays in closing due to title defects. If an issue arises concerning a risk covered under the policy, it covers legal fees and expenses related to defending the insured's title and compensates for any loss incurred.
Duration of Coverage
Owner's title insurance lasts as long as the insured owns the property, while lender's title insurance lasts only until the mortgage is paid off. If a property is sold, the new owner must obtain their own title insurance policy. However, owner's title insurance can provide coverage even after the sale for issues that may emerge later, as long as the insured retains an interest in the property.
Additional Considerations
Title insurance can also be beneficial during refinancing, as a new lender's policy will be required, while the original owner's policy remains in effect. This ensures continued protection against any undiscovered title defects that may arise during the life of the property.
Understanding the nuances of title insurance is crucial for homeowners and lenders alike, as it provides essential protection against potential financial losses related to property ownership.