When you buy a home, you "take title" to the property and establish legal ownership -- confirmed by local public land records. As part of the closing process, your lender will require a title search, and you'll need to purchase title insurance that covers your property.
Potential title problems
Part of your settlement process will be to have a title search conducted by employees of your title or settlement company through local property records. Some of the issues they're looking for include the following:
- Disputes between prior owners over wills: If your property was inherited and then sold by the heirs, there could be other heirs contesting the will and claiming ownership of your property.
- Liens for unpaid property taxes.
- Liens for contractors who worked on the home but were never paid.
- Clerical problems in courthouse documents: Believe it or not, a simple typo can lead to title claim problems.
- Fraudulent claims against the property or forged signatures: For example, if a group of heirs can't get a holdout to agree to sell the home, it's possible that someone will forge a signature on a quit claim deed.
Lender's title insurance and owner's title insurance
Although as the buyer you pay for the lender's title insurance premium, that policy only covers the lender in the case of a claim against the title. The policy pays for the expense of researching a claim and any court costs incurred due to the dispute.
Your title company will offer you owner's title insurance in addition to the lender's policy. In many states, owner's insurance is optional. In most areas, it's common for buyers to purchase owner's title insurance, but in some areas it's more common for the seller to buy the policy.
Owner's title insurance is recommended, because lender's insurance won't protect you personally if the insurance company loses a battle over legal title. You'd be required to pay for the continued fight over the title and could lose your investment in the property.
You can purchase basic or enhanced owner's title insurance, with the enhanced title insurance policy offering more coverage for things like mechanic's liens or boundary disputes.
While your title insurance covers you for things such as mistakes in the legal description of your property or human error, be aware that your title insurance will have some exclusions -- particularly in cases where violations of building codes occur after you bought your home.
Shopping for title insurance
Unlike other types of insurance, title insurance is paid with a single premium at your closing. If you're buying a resale or refinancing, you may be eligible for a "reissue" rate, which could offer a substantial discount off the regular premium -- because the title policy is already in effect, and the title research has already been completed.
In some states, title insurance premiums are the same no matter who you work with, but in the majority of states, you can save money by shopping around.
Get recommendations from REALTORS, lenders and friends, and be sure to check out the license and reputation of different companies online. Always compare the features of each policy and get adequately covered for your situation.
You can also visit www.HomeClosing101.org for more information on title insurance. While most homeowners never need to use their title insurance, its existence offers protection against a potentially aggravating -- and very expensive -- experience.