Do I really need title insurance?

A home is the largest purchase most families ever make. The vast majority of people wouldn’t hesitate to buy homeowner’s insurance to protect their investment against fire, theft, tornadoes, and so on. Title insurance protects people against losing their home in a different way – through discovering that they don’t actually have all the ownership rights they thought they did.

How could such a thing happen? There are a number of ways.

For instance, it might turn out that the person who sold the property didn’t have the complete ability to sell it, because someone else had a legal interest it. An example would be if the seller were divorced, and hadn’t realized that his or her ex-spouse had to sign off on the sale for it to be valid. Even though you bought the house in good faith (and even if the seller acted in good faith), someone else would still have a legal claim to the property.

Perhaps there are no skeletons in the seller’s closet, but there could also be problems if a previous owner didn’t have proper legal title to the home. For instance, a prior owner might have inherited the property from a relative … but many years afterward, a later will was discovered in which the relative changed his or her mind and left the property to someone else.

Another problem that can come up is if it’s discovered that someone has a lien on the home. A lien is a right to payment that’s guaranteed by the home – such that if the payment isn’t made, the creditor can force the sale of the home to get reimbursed out of the proceeds.

For instance, if the seller had at some point hired a contractor to perform work on the home, and didn’t pay the bill, the contractor might have a lien on the home. The problem with liens is that they follow the home – so even though it was the seller who didn’t pay the bill, the contractor could potentially sell your home to collect the debt.

A lien could also be placed on a home if the seller didn’t pay a tax bill at some point, or failed to pay child support. And remember, because a lien follows the home, it could still be there even if it was a prior owner who was delinquent on a tax bill, and not the current seller.

Yet another problem can arise if it’s discovered that someone has an easement on the property.

An easement is a legal right of someone who doesn’t own the property to use it for a particular purpose. For instance, neighbors might have an easement to share a common driveway, or drive across the property to access their own land. A city might have an easement to allow the public to cross the property to access a park or beach. Very commonly, utility companies have easements for maintaining their equipment.

There have been cases where people bought vacant land to build a house, only to discover a water main just under the surface, making the property useless. Another family discovered that a prior owner had installed an in-ground swimming pool in an area covered by a municipal drainage easement, and they had to spend many thousands of dollars in engineering fees in order to renegotiate the easement with the city.

If it turns out that there’s a problem with the title, a title insurance policy will typically cover your loss, and also pay the legal fees involved in handling the situation.

There are two types of title insurance policies – ones that protect a mortgage lender, and ones that protect the homeowner.

If you’re buying a home with a mortgage, the lender will typically require you to pay for a title search (having someone research the chain of title to see if there are any known liens, co-owners, or other problems), as well as for a title insurance policy that protects the lender. The search fee and the insurance policy fee will generally be a one-time charge paid at closing.

You aren’t legally obligated to buy your own policy, but you typically will have the option at closing (again, for a one-time fee). Sometimes, the seller will pay for the buyer’s policy.

Remember, the lender’s policy will only protect the lender’s interest – not yours. A separate homeowner’s policy will cover your own equity in the home, as well as any legal fees you have to pay.

Title insurance typically covers you for as long as you own the property. In most cases, if you die, it will continue to protect your heirs, and if you sell the property and a subsequent owner sues you over a title problem, it will continue to protect you as well. However, if you refinance, you will typically have to buy a new lender’s policy (even if you’re refinancing with the same lender).

Title insurance doesn’t cover everything. For instance, it won’t cover eminent domain proceedings, or subsequent government regulations that limit your use of the land. Generally, it won’t cover a boundary dispute with a neighbor, unless you pay for a special policy that requires a land survey.

The policy’s limit of coverage is usually the purchase price of the home. Some policies give you the option of paying a little more and having the policy limit increase with inflation.

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