Title Insurance

What is title insurance?

Title insurance is protection against loss arising from problems connected to the title to your property.

Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands went through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens.

Title insurance covers the insured party for any claims and legal fees that arise out of such problems.

Is purchasing title insurance obligatory?

It is if you need a mortgage, because all mortgage lenders require such protection for an amount equal to the loan. It lasts until the loan is repaid. As with mortgage insurance, it protects the lender but you pay the premium, which is a single-payment made upfront.

Does title insurance do anything for me?

The required insurance protects the lender up to the amount of the mortgage, but it doesn't protect your equity in the property. For that you need an owner's title policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy. It is advisable to do this because the additional cost above the cost of the lender policy is relatively small.

When does title insurance protection begin and end?

With the exception noted later, title will require the purchaser to obtain a new policy.

That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy. For example, if the contractor you failed to pay for remodeling your kitchen places a lien on your home, you are not protected by your title policy; the lien was placed after the date of the policy. You will probably be required to get the lien removed before you can sell the property. But in the event the lien hasn't been removed and a search has failed to uncover it, the new lender will be protected by a new policy.

Will title insurance protect me against false claims that arose after I purchased the property?

The standard policy does not, which is a weakness. Many events beyond your control can reduce the value of your house after you buy it. Identity theft can result in a new mortgage you know nothing about. A neighbor could build on your land without you knowledge, thereby adversely possessing and possibly eventually taking your land. Or you may suddenly be told that you must correct a zoning vioulation of the previous owner.

To deal with these issues, a new policy with expanded coverage has been developed. I am told it is virtually standard in California and is available in many other states, perhaps at a price increase. It is usually referred to as the ALTA Homeowner's Policy.

* from an article by Jack Guttentag, The Mortgage Professor

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