One of the last things on your mind when you are going through the homebuying process is whether or not you need Title Insurance. Let’s take a look at why your lender requires you to purchase a title insurance policy and why it makes sense to purchase one if you are paying cash.
What is title insurance and why do I need it?
The purpose of a title insurance is to protect the lien holder, or mortgage company, as well as the new homeowner from any clouds on title that could potentially impact the title of the home, here are a few examples:
- Fraud and forgery
- Conflicting wills
- Undisclosed heirs
A cloud on title is any document, claim, unreleased lien or encumbrance that might invalidate or impair the title to real property or make the title doubtful. Clouds on title are usually discovered during a title search. (Source)
Types of Title Insurance Policies
There are two different types of title insurance policies, both are shown below.
An owner’s policy aims to protect the investment of the homeowner and covers the following:
- Mistakes in record keeping
- Defects in records
- Encumbrances or judgments
- Deed omissions
- Undisclosed heirs
The purpose of a lender’s policy is to protect the mortgage lender. It covers the following items:
- Mechanics liens and unrecorded liens such as an unpaid bill for work that was completed on the property.
- Unrecorded easements, such as a fence line that crosses into your property and has been used by the neighbor for several years.
- Unrecorded documents such as “one-dollar deeds,” whereby a family member may attempt to gift the property without going through proper legal channels.
Is a title insurance policy required?
In terms of a lender’s title insurance policy, most lenders require a title insurance policy to be purchased to protect themselves against a loss resulting from the claims of others against your home. However, an owner’s title insurance policy is completely optional but a very wise investment that has the potential to save you a lot of money and future problems.
The homebuying process can be very complicated but the end result is often a joyous occasion. It’s best to ensure that you and your family are protected from the problems that a title insurance policy is designed to cover.