Title Insurance
Title insurance protects homeowners and lenders from financial loss due to defects in title to a property. Unlike other insurance that protects against future events, title insurance protects against issues that may have occurred in the past. Understanding title insurance helps you understand why it's required and what protection it provides.
What is Title Insurance?
Title insurance protects against losses from defects in title to real property. These defects might include fraud, forgery, liens, encumbrances, or gaps in the chain of title. If someone challenges your ownership, title insurance pays for legal defense and any losses up to the policy amount. This protection continues for as long as you own the property.
Title insurance differs from other insurance because it protects against past events rather than future occurrences. When you buy a policy, the insurer researches the property's history to identify issues. The policy then protects you from those issues. This one-time premium provides lifetime protection, making it a unique and valuable form of insurance.
Types of Title Insurance
There are two main types of title insurance: lender's title insurance and owner's title insurance. Lender's title insurance is required by mortgage lenders and protects their investment. This policy only covers the loan amount, not the owner's equity. As you pay down your loan, the coverage decreases. If you refinance, you'll need a new lender's policy.
Owner's title insurance is optional but strongly recommended. This policy protects your entire investment in the property, including your equity. The one-time premium is typically a small percentage of the property value and provides protection for as long as you own the home. Given the significant investment in your home, owner's title insurance is generally considered worth the cost.
What Title Insurance Covers
Title insurance protects against numerous potential problems. These include forged documents, such as deeds signed by someone impersonating the true owner. Undisclosed heirs claiming ownership are covered, as are mistakes in public records. Liens against the property, such as unpaid taxes or judgments, are also covered. Easements or restrictions that weren't disclosed can also be protected.
Other covered issues include boundary disputes, zoning violations, and encroachments. If someone builds a fence on your property or claims part of your land, title insurance provides protection. The policy covers legal fees to defend your title and any losses from successful claims. This comprehensive protection provides significant peace of mind for homeowners.
The Title Search
Before issuing a policy, title companies conduct a thorough search of public records. This search examines property records, court documents, tax records, and other files to identify any issues that might affect ownership. The search typically reveals any liens, judgments, or other encumbrances that must be cleared before closing.
Despite thorough searches, some issues may not be discovered. These "hidden risks" might include fraudulent deeds, unknown heirs, or errors in records. Title insurance protects against these undiscovered issues. The combination of the search and insurance provides comprehensive protection that would be difficult to achieve any other way.
ALTA Insurance
The American Land Title Association (ALTA) sets standards for title insurance policies. ALTA endorsements provide additional coverage for specific situations. These might include coverage for certain types of liens, access issues, or other specific concerns. Your title company can explain available endorsements and whether they're appropriate for your situation.
ALTA standards help ensure consistent coverage across different title companies. However, specific coverage can vary, so it's important to review your policy carefully. If you have specific concerns about your property, discuss them with your title company to ensure you have appropriate coverage.