When you purchase a piece of property, whether it is a home, an office building, or even an empty lot, the chances are that the ownership chain for that property is complicated.
Ownership can be traced back hundreds of years, and title to the property probably transferred many times.
There may be a link in that chain that is not as strong as you thought when you purchased the property. Perhaps a vendor or contractor has placed a lien on the property for unpaid bills, or someone forged a deed of transfer somewhere along the line.
It is next to impossible to be sure from your personal due diligence that the title chain for a piece of real estate is strong. Title Insurance is available to protect the owners and lenders of a building from any claims or legal fees that may arise if there is a weak link in the chain of title.
What Does Title Insurance Protect?
Title Insurance is similar to hazard insurance, except that instead of protecting against future events, title insurance protects you from events before your date of purchase. So if you fail to pay your property taxes after you buy a home and the chain of title breaks through a real estate tax lien, title insurance will not cover you. But if a former owner of the property failed to pay taxes and that failure wasn't caught before you purchased the property, the title company would be on the hook to protect you from any loss arising from that tax lien.
For this reason, title insurance companies perform extensive title searches on the real estate before agreeing to issue title insurance. The title company will issue a "commitment" to provide title insurance, which is subject to certain conditions and exclusions.
For instance, if you are purchasing a home, one of the requirements for obtaining title insurance for that home will be a deed from the current seller to you and a release of any mortgage that the seller may still owe on the property.
Exclusions from insurance include any claim another party may still have on your property, such as recorded easements by the city or municipality for utility access or mineral rights retained by a prior owner of the property. When you receive your commitment for title insurance, it is important to review it and ask questions about any of the conditions or exclusions you don't understand.
When Must You Get Title Insurance?
If you are purchasing real estate with the help of a mortgage loan, your lender will insist that you provide lender's title insurance in an amount equal to your note. Lender’s title insurance protects the lender from loss arising from a weak link in the chain of title. However, lender's insurance does not cover you or your equity in the property. You need to obtain owner's title insurance to protect yourself from potential loss arising from a break in the title chain of the property. In most cases, the cost of owner's title insurance policy is an add-on cost to the lender's title policy, making it a reasonable investment.
One weakness of standard title insurance for homeowners is that it will not cover you against fraud or other events out of your control that may occur after you purchase the property. For example, if someone steals your identity and puts a mortgage on your property, your title insurance will not cover any loss you incur because the event happened after you purchased the real estate.
In the same vein, if you buy a newly constructed home and a subcontractor files a mechanic's lien because the developer never paid them, you are not protected from that lien by your title insurance policy. Because of these weaknesses in the standard homeowner’s policy, title insurance companies now offer an expanded coverage policy that addresses these issues.
Your home may be the largest asset you ever invest in, and you would never think twice about insuring it against fire or damage. Title insurance is another critical piece of protection to give you peace of mind that the chain of title on the real estate is strong and your investment sound.