Guide to Title Insurance: How Title Insurance Works

A title insurance policy provides a buyer or lender with legal and financial protection against any past property ownership issues. A property’s title is the legal right of ownership that a person holds to a piece of property, usually transferred from one party to another in a property deed. A mortgage lender or buyer will obtain title insurance during a home sale to protect against financial losses from prior affairs bringing the legal ownership of a property into question. These issues might include unpaid property taxes, liens on the property, ownership disputes, or easements.

Title insurance is usually purchased by the home buyer for their bank, or by a home’s buyer or seller to protect the home buyer. Most buyers will perform a title search before agreeing to purchase a property, but title insurance provides an extra layer of protection should any problems arise after the sale.

There are two main types of title insurance policies: lender's title insurance and owner's title insurance, each of which provides different financial protections for the lender and the buyer in a real estate transaction. Here is an overview of those policies.

• Lender’s title insurance policy: A lender’s policy, sometimes called a loan policy, protects the mortgage lender from any title disputes that may arise after the real estate purchase. Before getting a loan, homebuyers are often required to purchase a lender’s title insurance policy to protect the lender from losses in the event of title issues. Lender’s policy costs are tied to the amount that the financial institution is loaning the buyer.
• Owner’s title insurance policy: An owner’s policy helps protect the buyer from any financial loss regarding a title dispute that originated before they bought or occupied the house. Owner’s title insurance is either bought by the seller or the buyer. The cost of an owner’s title policy is usually tied to the home purchase price.

Title insurance coverage protects against unforeseen future disputes that may arise from past ownership irregularities. For instance, not every encumbrance with a house is logged into the public record, such as implied easements. Title insurance can grant new owners peace of mind by protecting their finances and property.

A buyer or seller will purchase owner’s title insurance before the buyer closes on their new home. A buyer purchases the lender’s title insurance policy before the lending bank finalizes their home loan, protecting the financial institution from any title disputes that may impede them from recouping their investment. A buyer or seller will purchase owner’s title insurance before the new owner closes on the property.

Before closing, a mortgage lender will have a title company perform a title search and check for any prior disputes or claims against a property—also referred to as a “cloud on title” or “title defect.” If you purchase title insurance, you may be entitled to the following protections:

1. 1. Foreclosures: Certain title warranties won’t apply to a foreclosed property like they would to a new home because it can be a risky investment. Your real estate agent should do their due diligence and check the property with a title company before you agree to purchase a property, but certain events might be missing from the record. Title insurance can protect you from financial liability if any issues regarding prior foreclosures should arise after you take possession of the house.
2. 2. Liens: Liens are legal rights against assets that are used as collateral until a loan is paid off or a dispute is settled. Creditors or property servicers, like banks, plumbers, construction companies, etc., who haven’t been paid for previous services might have title claims against your property entitling them to certain assets. Title insurance will clear you from financial responsibility associated with any liens that originated before you owned the house.
3. 3. Encroachments and easements: Homeowner’s insurance can help protect the buyer against any issues that may diminish the size or use (and therefore value) of the property. Title insurance can cover repairs associated with eliminating certain utility structures or easements, which are rights for non-property owners to use a piece of land for a specific purpose.
4. 4. Forgeries and fraud: Title insurance can help cover an owner or lender in the event the home sale was not legitimate for example, the title deed was forged or legally belongs to an existing heir.
5. 5. Extended coverage: Some title insurers offer additional coverage, such as covering legal fees for property disputes, structural damage, building permit or zoning law violations, or the cost of improvements you’ve made to the home.

Title insurance will not cover hindrances that appear in public records, only those that are undisclosed and appear after the purchase. Also, it will not cover defects with the condition of the home itself, such as mold or termite infestations.

If you are buying a house, you will most likely need to purchase title insurance for your lender. Lenders typically require the borrower to purchase a lender’s policy before they are able to receive a mortgage loan, though owner’s insurance is optional. The one-time premium for an owner’s policy is due once escrow is completed and closing commences, at which time the title insurance policy goes into effect.

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