As a real estate lawyer, one of the most common questions I am asked by those buying homes is, “Do I need title insurance?”
The short answer is yes, you absolutely need title insurance.
The vast majority of those buying homes are financing the transaction through a bank loan or mortgage. The bank will require the purchaser to have title insurance.
Obviously, the bank wants to ensure the loan is repaid under any circumstances and therefore requires insurance to cover any title defects in the property.
The title insurance required by the bank will only cover the lender’s interest in your property through the institution’s mortgage.
However, this does not cover or ensure the owner of the property, which is why most people also obtain an owner’s title insurance policy, together with the lender’s policy.
Just like your homeowner’s policy or hazard insurance insures the physical structures on your property, title insurance insures your actual ownership of the property.
Title insurance protects you, as an owner of real property, from financial loss caused by circumstances which adversely affect or restrict the title to your property—in other words, title defects mentioned below.
Examples of title defects include lost or forged deeds, undisclosed heirs, transfers of property by incapable persons, incorrectly indexed deeds, undiscovered liens or other encumbrances, and no right to access to the property.
Such situations might seem unlikely but they do happen. An ABC affiliate TV news station recently reported the case of a Florida man trying to get a rental property back “after it was stolen using a forged deed.”
Expanded protection from an owner’s title insurance policy may also provide coverage against loss due to forced removal of the existing residence because the residence encroaches onto adjacent property, encroaches into an easement, or violates existing zoning law, and coverage if the property is lost because of a violation of any covenant or restriction that occurred before the property was acquired.
Additionally, an owner’s title insurance policy may also provide coverage against loss due to forced removal of the existing residence because any portion of the property was built without a building permit, and coverage against loss caused by the refusal of a buyer to purchase or the refusal of the lender to make a loan.
Inability to obtain a building permit for remodeling because of a violation of existing subdivision law may also be covered, as well as loss resulting from future encroachments onto the property (other than boundary walls or fences), and survey coverage provides coverage against loss resulting from adverse title matters that would have been disclosed by an accurate survey.
“But wait!” you might declare. “My attorney did a title search of the property before I bought. Shouldn’t he or she have found any defects?”
Yes and no.
Even if the closing attorney did a full and accurate title search of the property prior to the closing, the attorney would only be able to find defects in the title to the property which are either recorded on the land records or could have been discovered through a municipal search.
However, if evidence of the defect was not recorded in the land records, there is no way that an attorney could have discovered the existence of the defect through the title search.
To say it another way, title insurance covers defects to the title of your property that cannot be discoverable through a full and accurate title search of the land records.
This is why title insurance is so important when purchasing a home.
“But,” you say, “the seller gave me a warranty deed at the closing, warranting that he or she was transferring the property to me free and clear of all liens and encumbrances, and free and clear of all title defects!”
While it is certainly true that the seller has given a warranty deed in the situation, a new homebuyer certainly does not want to be in the position where they must now file a lawsuit against the seller in order to recover damages stemming from the title defect.
When you purchase a title insurance policy, the responsibility of either curing the defect or filing a lawsuit against the seller now falls on the title insurance company rather than the homeowner.
The cost of title insurance is a one-time premium paid through the closing and covers the entire length of the ownership of the property by the insured. The actual amount of the premium is based on the purchase price of the house.
Every purchaser of a new home should strongly consider, and would be highly advised, to obtain title insurance in order to protect both their down payment and future equity in the property.
Remember, if it’s not recorded in the land records, there is absolutely no way that a potential title defect will be discovered, and without title insurance in place, the loss resulting from the title defect will be borne by the homeowner and not the insurance company.