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What is title insurance? Do I need it?

Question:

I’m a first time home buyer and I want to know what title insurance is for. I’m paying cash (no loan). Can you tell me if I really need title insurance? When do I get it?

Answer:

To put it simply, if you do not have an owner’s title insurance policy and a legal claim is made against the property you purchased, you will have to defend the claim with money out of your own pocket. If you lose the legal battle, you may be in danger of losing the property and have no recourse.

For buyers that are taking out a loan to purchase the property, a lender will require you to take out a lender’s title policy…but keep in mind that this only covers the lender for their losses if title issues come up in the future. This is why an owner’s policy is important to consider.

You don’t know what the sellers have promised to others if they were in a difficult financial situation, what legal claims may be made in the future, or what other title issues may arise down the road. Title Insurance is a one time fee, paid at closing. It’s well worth the cost in light of the potential issues that could arise.

Claims to title might be fraudulent and easily disputed. However, title claims may also be legal and legitimate… mistakes happen, so liens or rights to ownership may have been missed through a preliminary title search by the title company (or a previous title company)…or may not have been known at the time of the sale.

Imagine the following examples:
1) The seller may have co-purchased the house with a brother he hasn’t talked to in ten years and is now unaware that he needs his brother’s signature to sell. What happens if the title company misses that and the home is sold to you anyways? The seller’s brother could come back to say that it was sold without his consent…now there is a question of who should legally own the property.
2) The seller may have purchased the home from a single woman, not realizing that her ex-husband still co-owned the property…and never got his signature as required for the sale, but it still went through. What happens if he comes back and makes a claim against the house after you own it?
3) The seller may have inherited the house under the terms of a will that was later to be found out-of-date and a more recent will leaves the house to someone else. What happens when the person that the home legally belongs to finds out that it was sold?
4) Taxes, Child Support, or Contractor’s Fees were legally liened against the house, but didn’t show up on a title search…for example, maybe a name was misspelled somewhere and the title company didn’t find it.

In any of these situations, title insurance would typically step in.

Let’s say that #3 occurs. There is no way that a preliminary title search (or you) could have revealed that prior to closing…and the court awards the home to a long lost relative. The owner’s policy will generally cover your financial losses, though you might still have to move out of the house.

If you are paying cash – you generally have more to lose than if you are taking out a mortgage (since a lender requires a policy be taken out to protect their interests and your losses are limited to the money you’ve put into the home). So, whether you “need” it or not depends on what your risk tolerance is, and how devastating it would be to lose your entire investment (plus legal fees) if you didn’t have an owner’s policy.

I hope that helps!

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