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Title Insurance – Why Do I Need It?

Title insurance covers potential damages from issues with the title and ownership of real estate. All lenders require title insurance to protect the lender from issues with the title and ownership.

A title insurance policy covers either a homeowner or a mortgage lender, and when both policies are issued simultaneously in the same closing transaction can result in a savings.

What is Title Insurance?

A title insurance policy provides coverage to the policyholder if there’s anything wrong with the title for an insured property.

When deeds or mortgages are recorded in the U.S., the recorder’s office does not verify whether the deed conveys good and clear title to the real estate or whether the mortgage is a first mortgage lien on the real estate.

The recorder’s office is only placing the deed and the mortgage into the official records for viewing by the public.

As a result, if the deed or mortgage or any other recorded document is placed in the official records and is fraudulent or forged, the recorded document now creates a title defect for the real estate referenced in the document.

This title defect may not become obvious until the real estate is sold or a mortgage is refinanced. This is where title insurance comes into play to provide coverage for matters that result in title defects on real estate.

The title insurance policy will compensate the policyholder by paying the cost to resolve the title defect or paying the policyholder the amount of the loss suffered up to the policy amount.

Every title insurance policy covers either a homeowner or the lender that provided the mortgage loan to purchase the property.

Lenders require you to pay for lender’s title insurance as part of your mortgage closing costs.

Homeowner’s title insurance is mostly optional, and is paid for by the seller or the buyer of the property.

Title insurance coverage begins when you buy the policy and extends indefinitely into the past, covering both known and unknown inconsistencies in the documented history of ownership.

Why Do You Need Title Insurance?

Purchasing lender’s title insurance is a mandatory part of the mortgage process. However, it’s often a good idea to buy title coverage for yourself as the homeowner.

Title insurance can compensate you for damages or legal costs in a variety of situations.

Title Insurance Protects You From…

  1. Previously unreported liens and easements on the property

  2. Forged transfers of ownership rights in the property

  3. Unintentional errors in recording or filing of documents

  4. Any other title defects that existed prior to the start of your policy

While the actual number of claims paid out to title insurance purchasers is relatively small, the open-ended nature of land recording in the US means that there are several scenarios—however unlikely—where title insurance can save you thousands of dollars in legal fees.

The possibility of defective title goes up if you’re purchasing a foreclosed or otherwise troubled property. In the most extreme situation, title insurance could end up compensating you for the forfeiture of the whole property.

© Lawrence Advisory, PLLC (2022)

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