What is “Title Insurance” and Why Should a Homebuyer Have it?

Anyone who has ever purchased a home or other real estate—especially if that purchase was made with mortgage financing—has seen an item on the Closing Statement entitled “title insurance.”  Most buyers do not really understand or appreciate what title insurance is, and why it is in their interests to have it.  Allow this blog post to provide a simple explanation.

After a buyer has contracted to purchase property, but before closing of that purchase and sale, attorneys will search and review the Public Records to make sure the seller has the right to convey title to that property, free and clear of all claims or liens.  If any claims (such as mortgages) or liens (such as claims of unpaid contractors for work done to improve the home) are properly recorded in the Public Records and identified by this “title review,” valid claims and liens will have to be paid at closing out of the seller’s proceeds, and the seller will be paid the balance of the purchase price remaining after such payments.  This process is designed to make sure that the buyer gets good and marketable title to the property, free and clear of any claims except claims made against the buyer’s own interest—such as any mortgage the buyer uses to complete the purchase.

What would a buyer do if the attorneys missed something in their title review?  What options would a buyer have if a lien is later claimed for work done for the seller, but that lien may not have been adequately preserved or “perfected” according to law?  Defending a lawsuit over such matters might be more expensive than paying the lien.  Suing the attorneys who made the mistake by failing to identify a valid claim might be another option.  But, again, lawsuits can be time-consuming, stressful and expensive.  Even if the buyer were ultimately to prevail, it might cost the buyer many thousands of dollars to get to the point of winning a case in court.  This is the purpose of title insurance.

Like most other insurable risks, it is common for buyers of real property to purchase insurance covering the risk that some claim or lien, whether valid or perhaps even invalid or frivolous, may be made against the buyer’s ownership interest in that property.  If a claim is made against the property, the buyer has the right to file a claim against that policy of title insurance; and the title insurer has the obligation to “take it from there,” whether that means defending against a claim in court or paying a valid claim so that it is released.  If the buyer purchased the property with mortgage financing, their lender required title insurance for these reasons.  The lender wanted insurance protecting its sizeable loan to purchase the property.  The premium for the “simultaneous issue” of an Owner’s Policy of title insurance is relatively small, and the homebuyer is well advised to pay that premium to make sure there is coverage for claims that might exceed the amount of the mortgage.  The most important function of title insurance is to provide legal protection of the buyer’s title to the asset he or she is purchasing.  An additional benefit is the peace of mind it provides.