A title is one of the most important documents you’ll receive during your home purchase. However, if it’s not a clear title, you could end up in financial distress. The title to your property is proof that you (and any co-owners) are the only ones with a legal claim to ownership. A title search occurs during the home-buying process to ensure there are no liens or other encumbrances against the property. However, a clean title search doesn’t provide a foolproof guarantee that no title defects will be discovered in the future. Title insurance protects mortgage lenders and property owners against such unpleasant surprises.
What Is Title Insurance?
Imagine if you purchased a new home only to find out that the seller had no legal claim to the property. You would still owe the bank thousands and most likely have to fight to keep your home. Even with the most meticulous search of public records, a number of title issues may arise. Such issues are usually a result of mistakes in recording documents, forgeries, fraud, unpaid taxes, or missing heirs.
Title insurance protects home buyers and mortgage lenders from financial losses caused by title defects. An insurance policy purchased by a homeowner to protect against title defects, this policy covers conflicting ownership claims, disputes, outstanding lawsuits, liens, or any other encumbrances that invalidate the seller’s legal claim. It also covers flawed public records, incorrect signatures, fraud, and undisclosed easements that may limit the usage of the property.
Title insurance is a one-time purchase that is rolled into the buyer’s closing costs. Homebuyers may have the choice to purchase the policy from the title company that completes the title search or from an insurance company.
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There are two types of title insurance, and the policy you choose dictates who is protected.
- Owner’s Title Insurance: This policy protect the homeowner against title defects for the length of time they own the property.
- Lender’s Title Insurance: This policy protects the lender against title defects for the length of your loan. It ensures the loan will be paid off but offers no further protection for the homeowner.
Is Title Insurance Mandatory?
While title insurance is not mandatory by law, it may be required by your mortgage lender. As mentioned above, a lender’s title insurance is designed to ensure your mortgage lender recoups the value of the loan. To protect their investment, your mortgage lender will likely require you to purchase the lender’s title insurance before closing. However, owner’s title insurance is optional.
Should I Buy Mortgage Title Insurance With Owner’s Coverage?
In some ways, all insurance policies are investments you hope you’ll never need. However, they are an essential form of risk protection that can help you avoid financial distress. A typical title search spans the past 50 years. Title defects can occur at any time and are occasionally missed during a thorough title search. When you purchase lender’s title insurance, you’ll have the option to consider owner’s coverage as well. Unfortunately, many homeowners hesitate to recognize the value of this investment.
In the same way, your homeowner’s insurance policy protects you against the financial damages that occur if your home is damaged or destroyed due to a covered loss, title insurance provides protection that helps you keep your home. Most home buyers are surprised to learn that there are many incidents that could lead to title disputes.
Some common examples of risks covered by your owner’s coverage include the following:
- Unpaid taxes
- Property line disputes
- Conflicting wills
- Improper execution of documents
- Unknown or undisclosed heirs
- Undisclosed HELOC loans
- Forgeries and fraud
- Unpaid judgments and liens
- Undisclosed easements
- Incorrect signatures on documents
- Unpaid condo fees
- Mental incompetence of the grantors on the deed
A lender’s policy only ensures that your lender has a valid, enforceable lien on your property. It provides no protection for the homeowner. An owner’s title policy protects you from covered title defects that existed prior to the issue date of your policy. When filing a valid claim, the policy covers your financial losses up to your policy limit.
Purchasing Title Insurance
A title search is typically a mandatory step in the home-buying process. In the same way, a home inspection helps your lender protect their investment against potential unknowns about a property, the title insurance covers potential issues regarding the seller’s ownership. Most often, your lender chooses the title company that completes the search. The completion of the search typically includes the lender’s title insurance. The cost of the search and the policy rolls into closing costs paid by you as the home buyer.
At this time, you’ll likely be presented with the opportunity to purchase an owner’s title policy as well. While you might have to pay for the policy yourself, sometimes the seller will be willing to foot the cost in an effort to close the sale. In this case, professionals draw up a contingency, and the owner’s title insurance rolls into the closing costs of the seller.
Sometimes, a home buyer chooses not to purchase owner’s title insurance at the time of the home purchase. Luckily, there are other times you can purchase title insurance. As you pay down your loan, you’ll have more equity in your property. This also increases your risk in the event of a title defect. Whether you decide to purchase owner’s title insurance immediately after closing or as you pay down your loan, it’s a good idea to compare shops. Your independent insurance agent might be able to offer you a title insurance policy at a considerably more affordable cost than a title company.
Imagine purchasing the home of your dreams only to discover a previous owner had thousands of dollars of unpaid taxes on the property. Without the right coverage, you pay the difference out of pocket or risk losing your home to the tax collector. Owner’s title insurance protects you against financial distress related to title defects for as long as you own the property. If you’re a homeowner in Massachusetts or considering the purchase of a home, get in touch with the independent insurance agents at LoPriore to learn more about the protection that can be derived from title insurance.
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