You've probably heard a lot about title insurance after the housing bubble and the mess in the chain of titles since. Title insurance is a relatively boring, but must-have insurance, and perhaps one of the best values in all of the insurance world. Title insurance protects you from virtually every peril associated with the ownership of your home and property. As you may already be aware, a title is required to show ownership and change of ownership for real estate. On that title may be liens (from a mortgage company or municipality) or other claims.
As expected with high value transactions, there can be plenty of errors in record keeping. Some records may be centuries old, with land tracts divided up, sold, borrowed against, and taxed over the course of generations. By purchasing title insurance, you protect yourself against other claims of ownership on your property, or any unknown liens.
Chain of Title
Each title begins with the first owner and extends through all the owners down to the most recent. Also listed on the title are reconveyances, or proof that the land is paid off after sale. If you were to buy a home and accompanying real estate in 1970 with a 30 year mortgage, a reconveyance would be placed on the title in the year 2000.
Sometimes reconveyances aren't recorded accurately and the title shows that the land has yet to be paid off. After discovering this issue, the bank may check its records. Unfortunately, even the lending institution may have poor records, and decide to sue for eviction, foreclosure, and ownership of the property. This is where title insurance comes into play.
In the above case, an owner with title insurance would be protected from the lawsuit and the value of the home at the time of the case.
Three Types of Insurance
Title insurance brokers have three types of coverage: owners, lender's and extended coverage. Owners title policies cover six issues: clear titles, incorrect or nonexistant signatures, forgery and fraud, improper records, restrictive covenants, and various judgments and liens.
These policies became critically important after the explosion in mortgage-backed securities and post-loan sales of mortgages. Banks routinely sell mortgages to other banks and investors. During this time, new records are recorded and some are recorded incorrectly. Also, during the real estate boom, a number of loans were made with falsified documents. Title insurance protected those buyers.
Next are extended owner's policies that cover building permit violations, subdivision map errors, living trusts, structural damage from mining or digging, forgeries plus the incidents listed in the basic coverage.
Lender's title policies help protect the lender. These policies include three major protections: mechanic's liens, access and easement rights, and problems in record keeping. Lenders have little interest in making loans against homes on which there are existing liens, thus title insurance protects their hundred thousand dollar investments for mere pennies on the dollar.
Insurance That Lasts Forever
Title insurance policies last forever. Believe it or not, you pay the premium once, and then never again. The coverage extends for as long as you own the title to the property, and in the future against any other possible problems, errors, or omissions. Of all the insurance you can purchase for your home, there is perhaps no other insurance that is as inexpensive and that provides so much coverage.
Some localities require that the purchasing party buy the insurance while others dictate the seller purchase the title for the buyer. In other places, the premium or fee is split.
The amount that is paid for coverage depends on the previous sale prices, number of owners and the type and location of the real estate. High valued property will have larger old liens. Property located by a mining operation may have suffered damage from mineral rights uses. No matter how many variables come into play, title insurance remains the most inexpensive insurance sold.