After pounding the pavement in search of the perfect home, you finally find one. An offer is put in and accepted, and all closing processes and costs are taken care of. You move in and begin life in your new home – what could possibly go wrong?
That depends on whether or not you opted for title insurance.
When you buy a home, you’re given title to the property. It’s this title that provides you – the new owner – with the right to possess and use the home and the land that it’s on.
But sometimes title isn’t exactly yours, despite your name being on the purchase contract. That’s where title insurance comes into the picture.
Obtaining title insurance is a standard step before closing on the purchase of a home, and it’s a crucial one. It’s what protects you and your lender from the possibility that the current or previous sellers don’t actually have the legal right to transfer ownership to you because they never actually had free and clear ownership of the property in the first place.
Sure, these situations aren’t exactly common, but they’re still very possible, and do happen. And the cost associated with paying for such insurance far outweighs the nightmare that would ensue in the event that you discover that you don’t actually have free and clear title on the property, and stand the chance of losing it.
What Can Happen Without Title Insurance?
In the worst case scenario, sellers may willingly deceive you by selling you the property knowing that they don’t own it. These situations are far and few in between, but they have happened.
More typical title issues are more about pure ignorance and lack of facts about the true state of title. Let’s say the seller co-purchased the home with her then-husband, who now lives elsewhere following their divorce a few years back. Perhaps she is unaware that she actually needs her ex’s signature on the purchase agreement in order to legally sell and fully transfer title.
Other common title issues stem from liens placed on the property for work performed on the home that was never fully paid for. For instance, a contractor may have completed an addition to the home, but the previous owners didn’t pay up for the work performed. As a result, the contractor placed a lien on the property, which means they’ve got their name on public record until the debt owed is discharged. Liens typically rear their ugly heads when properties are sold and unsuspecting buyers are suddenly faced with them.
In both of these situations – along with many more potential scenarios – title insurance can offer protection.
Title Searches Can Help Uncover Issues
The first task that a title insurance agency will conduct is a title search before an insurance policy is even issued. This will help identify any potential problems with title on a property.
After analyzing public records related to the history of property ownership – such as divorce decrees, wills, trusts, and tax records – limitations on how the property can legally be used can be uncovered, as well as any rights that others might have on the property.
This preliminary title report will provide the opportunity to spot any issues before going any further with the sale, or even call it off completely if the problems are far too serious to deal with. It also offers the chance to keep everyone in the loop about what can and can’t be covered under insurance.
The good news is, any problems that arise are the seller’s problem, not yours – as the buyer, you shouldn’t be slapped with the responsibility of acting on any defects on title. You’re being promised title that’s free and clear, and as such, the closing agent will typically deal with the seller’s agent if the title report shows a problem.
Why Do You Need Title Insurance?
If an initial title search is conducted and you find that there are some issues, why do you need title insurance if you can just deal with these problems before you buy the property? If issues are uncovered, what’s the point of paying for title insurance after the fact?
It might sound counterintuitive to purchase insurance to pay for things that have already occurred and been discovered, as opposed to getting insurance to cover events that haven’t happened yet. You wouldn’t expect to get coverage for a car accident when you buy auto insurance after the incident occurs, much like buying property insurance wouldn’t be useful after a fire has already occurred.
But title insurance works a little differently. This type of insurance covers issues related to title of the property after they’ve already occurred, instead of covering events that happen after insurance has been issued. If there are liens on the property that weren’t paid by previous owners a decade earlier, or if a long lost relative suddenly appears and claims the property’s title, then you may have coverage under your current title insurance policy.
Title searches are done to uncover potential issues with the title, which helps to minimize any risks when it comes to offering insurance policies. If certain issues related to the policy are not resolved through an initial title search, they’ll often be itemized as exceptions on the policy. It’s up to you if you want to still go ahead with the purchase following the discovery of known issues with title.
A competent title insurance policy will offer coverage for the financial repercussions of these events, since they significantly affect your ownership of the property. If a claim is brought up against your ownership rights in the property, your title insurance company will cover the expenses related to legally defending against the title claim.
With no title insurance policy, you’ll be responsible to come up with the funds needed to deal with these issues on your own. In that case, it’s worth the nominal fee needed to pay for title insurance for a little peace of mind.