A title is something that is required for every home purchase, no matter what mortgage program you use or what lender you choose. Even if you were to pay cash for a property, you would need a title. In addition to the title, it is recommended that you have title insurance on the property to protect yourself.
The Definition of a Property Title
First, let’s look at what the title of the property does for you. The title is what gives you legal ownership of the property you purchased with a loan or cash. It gives you the right to the property. Even though you have legal rights to the property as of today, that does not mean that there are not issues with the title from previous years and previous owners. A few of the issues that could come up include:
- Issues with ownership claims
- Unpaid liens
- Covenants of record
Each of these issues could pose a serious threat to your ownership in the property, especially issues with ownership claims. If there was an illegal transfer of the property rights at some point down the road, it could come up to haunt a future owner much further down the line.
Title Insurance Protects You
In order to protect yourself against any of the adverse events described above, you should purchase title insurance. Just like any other insurance policy, it protects your financial interests in the property and prevents others from taking you to court and taking the property or other assets from you. The way that this insurance differs is that you are purchasing insurance for past events, rather than something that could happen in the future. In fact, this insurance does not cover future occurrences on the house.
The Role of the Title Search
Before title insurance is ever issued, the title company will perform what is called a title search. This is a procedure where the title examiner goes through the past records of the property to determine that there are no outstanding issues. They will look for things like:
- Outstanding mortgages
- Outstanding mechanics liens
- Tax liens
If any of these issues or other issues shows up, title insurance will not be able to be purchased until the issues are cleared. In certain cases, the title company will issue the insurance but will have a rider on the policy that excludes any issues that showed up in the title search.
The Types of Title Insurance Available
There are two types of title insurance available on your property: lender’s insurance and owner’s insurance. If you took out a mortgage on the property, lender’s insurance will be required. This type of insurance protects the lender in the event that something comes up on the title down the road. The amount of the lender’s insurance is equal to the loan amount and as you pay the principal balance of the mortgage down, the amount of the lender’s insurance decreases accordingly. This helps to protect the lender’s value that they are entitled to on the property should somebody come and try to stake a claim on it down the road.
The owner’s policy is a little different. This insurance protects you, the owner. When you first take out a mortgage, the owner’s policy might not seem like a big deal, but as more time passes and you gain more equity in the home, your investment is more and more at risk. The owner’s policy provides you with full protection at the onset of the purchase, covering the full value of the home.
The Cost of the Insurance
The good news is that title insurance is not very expensive and it is a one-time fee. You typically pay for this insurance at the closing and never have to pay it again. You are covered for the entire period that you own the home.
Everyone should consider title insurance when purchasing a home, whether for cash or with a mortgage. The lender will always require a lender’s policy on the home, but you should also consider the owner’s policy with an inflation rider should the value of your home increase down the road. This way you are always protected against anyone staking a claim against your property for something that happened long before you ever took ownership of the property.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.