Do You Know Why You Need Title Insurance?

By Teresa Ambord

What exactly does title insurance cover?

Unlike most insurance, which covers events that may occur in the future, like medical needs or automobile accidents, title insurance covers the past.

You and your lender need the assurance that the “chain of title” is good.  That means all transfers of ownership on that property were legal and aboveboard.  In other words, nobody will come to your door and tell you that the house you just bought belongs to them because some unscrupulous person forged a signature on a deed twenty years ago.

Before a title insurance company will issue a policy, they do their homework.  A title searcher or an attorney searches the title back 50 years or more, looking for evidence of wrongdoing or errors.   They look at all public records dealing with the property.  But there will always be some things that can’t be detected.  On rare occasions (only 5 to 10 percent presumably) the title company will have to pay a claim arising from something that was missed or not detectable.

If the title company finds a problem, they will seek to clear it up.  If they can’t clear it up, they will either refuse to write the policy, or they will “except” the problem area.

Here is what the title company is looking for:

• Unpaid property taxes, liens, unresolved claims, or clues that may indicate that an improper transfer of ownership occurred.
• Evidence that all prior mortgages were released.
• And smaller problems such as misspelled names, or errors in the property’s legal description.

Once all of the available records have been examined and the searcher is confident that the title is clean, the title company will draw up a commitment to insure, and then a policy of title insurance.

As mentioned above, the title policy (which is paid for by the seller, as a sort of promise that the title is good) on a mortgaged house insures the lender, not the owner.  But for a small additional fee you can also get an owner’s policy that covers your equity.   As you pay down your mortgage and your equity goes up, so does the amount of your coverage under the title policy.

Some states heavily regulate the title insurance industry.   But if your state is not one of them, you can shop around among title insurance providers, and possibly save hundreds of dollars.  There are at least two other ways you might be able to save money on title insurance as well.

• Hold open rate:  If you bought the house intending to sell it again soon, say within a year, the title company can keep the title commitment open.  The policy is then written on the second transfer, not the transfer that occurred when you bought the home.  The savings? About 90 percent.
• Refinance or reissue rate: If you refinance the home within ten years or so, the title search only needs to cover the years since you bought the home.   That way, your rate is much lower.