This Is Why Title Insurance Is Important

When someone relies on a lender to help them purchase real estate property, a lender will often insist on some sort of title insurance to reduce their risk of anything happing to the collateral on their loan. But the little-known caveat to that little requirement is that they are the only beneficiaries of that insurance should a claim need to be filed. In this brief article we are going to take a look at some of the reasons that you should get title insurance for yourself whether utilizing a lender or making a cash offer. The alternative could mean placing your largest financial investment at risk of being taken from you.

When you apply for title insurance the property will receive a cursory background check immediately to check for any red flags or prohibitive issues and then another check later just before closing to ensure that the current property owner hasn’t made any last minute adjustments or deals on the side just before officially handing over the deed. Generally, what will happen after the first title check is that a report (usually called an abstract) will be prepared and forwarded to you. This report will highlight any issues or problems if they exist.

The title check will make sure that there are no current liens against the property, such as mechanics liens for unpaid work and services or tax liens for unpaid property taxes or unpaid HOA dues. They will also check for any outstanding code violations or other property violation issues that could hinder sale or insurance activities. Finally, they will check for things such encumbrances or easements, such as access for a power company or if the mineral rights have been sold off.

You will receive a copy of this report, as will any potential lender that may be considering financing the purchase of the property for someone. If everything is in good standing then they will notify you and begin preparing a policy for the property. The only thing to keep in mind at this stage is no policy will actually go in to effect until the actual day of closing when all of the paperwork is signed and ownership of the property actually transfers to you. If, and when, that day occurs then you will be notified that the title is officially covered and you will often receive a copy of the policy by mail within a few weeks.

Now, more things to keep in mind here are, first and foremost, make sure that the policy you have taken out is an owners policy and not just a lenders policy. While lenders will require you to get such a policy, a lenders policy only applies to the lender if they need it. If a problem arises and the insurance is needed, then the lender will be covered but NOT you. Do not be fooled into thinking that the lender policy does or will offer you any help whatsoever because it will not — at all. The lender policy is often cheaper than the owners policy, but also do not let that deter you. Not getting an owners policy might be okay or it might cost you big time if something happens later on.

All of the checks and all of the procedure that go into initiating a title insurance policy are only to make sure that the policy can actually go into effect validly. The real power of the owners policy may come (hopefully not) much later on if an occasion arises that challenges your ownership of the property in some way. It sounds outlandish until some long lost heir to the previous owner shows up and claims that the house was sold illegally and they are the rightful owner or until a neighbor shows up waiving a document around claiming that they had an agreement with the original owner about right away access across the property for some reason. There are one-hundred other ways that bad news could show up at your door, and hopefully it never will, but if it does, then that is where you tile insurance will come to the rescue.

Also of note here is the fact that, when you first receive the paperwork for your policy (or even before applying for it) make sure that you read and review it thoroughly — making a huge point to take notes and ask about anything that you do not understand. Most policies will come with exceptions explicitly stating what they will not / do not cover and why. It is important to be clear on these exceptions, as well as any rules that they may have, when you are shopping for title insurance coverage. This is how you will get the best protection that may actually serve your needs if that time ever comes.

Finally, an astonishing amount of people tend to balk at the thought of spending a one-time payment of around $1,000 on something that may never actually need. That is just amazing to me. When someone gets a new property they will often begin spending money like crazy on new appliances, new carpeting, new windows, and a host of other things that are based on appearance. But suggest something as practical as NOT having to spend thousands of dollars in court fighting some frivolous land claim and they just stare at you as if you somehow insulted their mother. Even more odd, they will readily take advice from anyone who says something to the effect of title insurance being a waste of money — but none of the people that they take advice from will be standing next to them in a courtroom dealing with a legal mess if it ever comes to that.

Okay, stepping down off of my soap box, now. I know for a fact what a bad idea it is not to have title insurance. I never had to learn the hard way and I work on everyone of my clients so that they do not have to, either. It is completely up to you what you do or do not do with this advice. Whatever it is that you choose, I wish you a long and happy home ownership experience. Always make sure to thoroughly read (and store somewhere safe) all of your documents from the beginning of the process until the day they hand you the keys. Also, if you can spare the time, check out some of the other articles I’ve written. In the meantime, stay safe and take care!