Title Insurance Can Protect your Home if a Previous Owner Tries to Claim your Property

01 Oct

Buying a house is a lot of work, and once you have found the perfect home you want to protect it with insurance. In addition to your homeowners policy, a title insurance policy will help protect your investment. 

Here is a quick overview about title insurance and why you need it to fully protect your home. 

What exactly is title insurance?

Title insurance will protect the investment you have made in your home if you are sued by another person who argues that they have a claim on your house.  As an example, if the previous owner of your home died and heirs were missing or unknown at the time of their death, it is possible that heirs could crop up after you have bought the house and contest the ownership. 

In other cases, it is possible that the previous owners neglected to pay a contractor for work done on the house, a plumber for a repair or even ignored their tax bills. It is possible for these people to put a lien on your home for the unpaid debt, even after you have closed, and the house is yours. 

A title insurance company performs a title search on your home, looking for issues like this or others that could crop up after you buy the house.  If they manage to find some issues, they will work to resolve or “cure” them. If necessary, they may work with you or the seller to resolve any issues before you close on the house. 

If they don’t find anything suspicious or questionable, they will consider the title clear or “cured” and will issue a title insurance policy for your home that remains in effect until you sell the house. 

Some of the most common defects in a title that crop up include, but are not limited to, the following:

  • Tax liens regarding unpaid taxes
  • Construction liens, which are also known as mechanics’ liens. These cover things such as unpaid construction or renovation bills
  • Creditor liens such as an unpaid balance on a mortgage
  • Court judgments. This can include things such as a divorce judgment that awards part of the property to a former spouse

Once a title policy has been issued, it will cover any future costs that come from title disputes. It covers costs such as legal expenses if a lawsuit from a contractor or heir crops up. In the very rare event that a court decided that you were not the legal owner of the property the title insurance policy would cover you for your loss of equity in the property. 

Title insurance policies usually come with a coverage limit that is the properties assessed value at the time the policy is issued. It is possible to purchase additional coverage at the time the policy is written but this is fairly rare. 

How much does title insurance cost?

Title insurance comes with a one-time payment so you will not be receiving a monthly title insurance bill. The cost of a policy will vary depending on the price of your home as well as any state regulations that impact this type of coverage but in general, expect to pay between $500 and $1,500 for coverage. 

What is the difference between lender’s title insurance and owner’s title insurance?

In addition to your own title insurance policy, if you have a mortgage on your home (most of us do) your lender will require that you purchase a lenders title policy as well. These policies only protect the lenders investment in your home, they offer you zero protection. 

These policies cover legal costs and any out of pocket losses the lender would incur due to issues with the title. In order for your interests to be protected you need to purchase an owner’s title policy as well. 

Do I really need an owner’s title insurance policy?

While it is often not a requirement, it is almost always a good idea. Despite the fact that title insurance is rarely used, if you do end up needing it, the losses it covers are fairly large. This coverage provides peace of mind against large expenses and is a very affordable coverage. 

Imagine an heir comes to light and the courts decide you do not legally own the home, you would be out your entire investment which includes your down payment, and all mortgage payments that you have made up to that point. Can you easily absorb that loss? If the answer is no you should absolutely have title insurance in place. 

One of the most common claims on title insurance is related to unpaid taxes. If the previous owner left a pile of unpaid tax bills you will have to pay them out of pocket, or your home can be taken away by the taxing authority. 

The Bottom Line

In most cases it will be mandatory that you purchase a lenders policy but unless you can easily replace your home or cover large tax or contractor bills, you should absolutely put a owners title insurance policy in place. It will give you peace of mind and protect your finances in event that a title issue comes up after you have purchased your new home

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