Title insurance explained

Title insurance is a type of indemnity insurance that protects lenders and homebuyers against financial loss caused by faults in a property’s title. Lender’s title insurance is the most frequent kind of title insurance, which the borrower acquires to protect the lender. Owner’s title insurance, on the other hand, is frequently paid for by the seller to safeguard the buyer’s equity in the property.

Title insurance process

Any real estate transaction requires a legal title. Before a title can be given, title firms must do a search to see whether there are any claims or liens against it.

A title search is a check of public documents to establish and confirm legal ownership of a property and to see whether there are any claims against it. Erroneous surveys and unsolved building code violations are two examples of flaws that might tarnish the title.

Both lenders and homebuyers are protected by title insurance against loss or harm caused by liens, encumbrances, or problems in a property’s title or real ownership. Back taxes, liens (from mortgage loans, home equity lines of credit, and competing wills are all common claims made against a title. Unlike typical insurance, which covers claims for future events, title insurance covers claims for past events.

Types of title insurance

Lender’s title insurance and owner’s title insurance are the two forms of title insurance. Almost every lender requires the borrower to obtain a lender’s title insurance policy to protect the lender if the seller is unable to lawfully transfer the title or ownership rights. The policy of a lender solely protects the lender from loss. The conclusion of a title search is indicated by the issuance of a policy, which provides some confidence to the buyer.

Because title searches are not perfect, and the owner is still at danger of financial loss, further protection in the form of an owner’s title insurance policy is required. Owner’s title insurance, which is frequently obtained by the seller to safeguard the buyer against title flaws, is an optional purchase.

Benefits of title insurance

The buyer is covered by title insurance for as long as they own—or have an interest in—the property. Similarly, title insurance provided by the lender protects banks and other mortgage lenders from unregistered liens, unrecorded access rights, and other problems.

Without title insurance, transacting parties are exposed to severe risk in the case of a title problem. Consider a homebuyer who finds the home of their dreams only to discover unpaid property taxes from the previous owner after closing.

Without title insurance, the buyer bears the whole financial burden of this back tax demand. They must either pay the back taxes or risk losing their home to the taxation authority.