I always recommend that buyers purchase an owner’s policy of title insurance. The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement.
What Is Title Insurance?
Title insurance is policy of indemnity protecting homeowners and lenders from financial loss in the event that certain problems develop regarding the rights to ownership of property. While closing attorneys check each title to real estate before a closing, there are often hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.
There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by every public mortgage lender, but do not protect a property owner. Buyers must separately purchase an owner’s policy.
Title Defects: What Does An Owner’s Title Insurance Policy Cover?
As an example, a seller recently was shocked to learn a day before the closing that there were several un-discharged mortgages and liens on her unit left over from the original developer. Fortunately, she had purchased title insurance which enabled the closing to go forward as scheduled, with the title company undertaking the obligation to discharge the liens and clear the title.
Other common title defects which are covered by standard owner’s title insurance include:
• Sudden appearance of unknown heirs claiming an interest in the property
• Forged deeds or impersonations
• Incorrect legal descriptions
• Improper recording of deeds
There is also a newer enhanced coverage policy available from First American Title and other companies which covers many situations excluded by standard policies such as:
• Building permit violations
• Adverse possession or prescriptive easements
• Building encroachments
• Incorrect surveys
• Pre-existing violations of subdivision, zoning laws, restrictive covenants.