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Publish Date: 08.18.2022
Author: Kristen Orr
Reviewed by: Dave Soldini & Ron Nelson
Outside of the real estate industry, many people don’t know what title insurance is until they find themselves in the middle of a real estate transaction. Even then, some still don’t fully understand exactly what title insurance is and why it’s important. We’re going to give you the rundown on the purpose of title insurance, what it means to lenders, buyers, and sellers, and briefly explain the difference between and owner’s policy and lender’s policy.
What is title insurance?
The official definition of title insurance is “a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property.” [1] To put it simply, title insurance is what protects lenders, buyers, and sellers from financial loss to defects in a title to a property. Title insurance also provides any legal defense needed when there are defects in a title. When a real estate transaction is made, the title insurance record
is filed in a public archive that contains details on the history of ownership of a property.
Defects in a title could arise at any time; even months or years after purchasing a property. There are several different issues that one may encounter, even after the most meticulous search of public records. Some common examples of risks covered by an owner’s policy include defects in title caused by:
Improper execution of documents
Mistakes in recording or indexing legal documents
Forgeries and fraud
Undisclosed or missing heirs
Unpaid taxes and assessments
Unpaid judgments and liens
Unreleased mortgages
Mental incompetence of
grantors on the deed
Impersonation of the true owners of the land by fraudulent persons
Refusal of a potential purchaser to accept title based on the condition of the title [2]
Owner’s policy vs. lender’s policy
We’ll save the details for another blog post, but the main differentiating factor is that the owner’s policy and lender’s policy protect different parties a real estate transaction.
An owner’s policy is designed to protect property owners from covered title defects that existed prior to the issue date of your policy. If a valid claim is filed, your owner’s policy, subject to its terms and conditions, will cover financial loss up to the face amount of your policy. [2]
A lender’s policy provides no coverage to the homeowner. A lender’s policy insures that the lender has a valid, enforceable lien on your property. Most lenders require borrowers to purchase this type of insurance policy to protect their investment.2
Overall, title insurance plays a substantial role when buying or selling property. Without it, lenders, buyers, and sellers have no protection from financial loss. We hope that after reading our little blurb, you have a better understanding of what title insurance is and why it’s important.
Thanks for reading! Stay tuned for more blog posts!
Sources: [1] Hayes, Adam. “Title Insurance.” Investopedia, 10 Sept. 2021, investopedia.com/terms/t/title_insurance.asp. Accessed 5 Aug. 2022.