For many of us fortunate enough to think about buying our own home, it’s likely the biggest and most expensive thing we will ever purchase. So, it’s no surprise that the process can be a bit more complicated than one might expect. In addition to things like escrow accounts, commission fees, and closing costs, you have to make sure there are no problems with the title of your new home. For this reason, many prospective buyers purchase title insurance. Read on to learn how title insurance works and why it’s a smart investment.
Different Types of Title Issues
First, “title” refers to legal ownership and the right to possess something, whether it’s a house, car, boat, or other item. When you have “clear title” you own the asset without any encumbrances on your ownership of it. Some of the types of issues you could have with the title to your home include the following:
- Liens: A lien is a claim on the property to repay a debt owed by the homeowner (or a previous owner). For example, if you’ve refused to pay a contractor for home improvement work, he may get a lien on your house as security to satisfy the debt. Common liens include mortgage liens, mechanics’ liens, and tax liens.
- Claims of ownership interests: Other people may claim they have an ownership interest in the property you’re trying to buy.
- Covenants: A previous owner may have made certain promises to another person or entity regarding the use of the property. For example, an owner may have agreed to let the utility company run power lines across the property. Or there may be an HOA that has rules about what colors you can paint your house.
There are many types of problems you can run into with the title of your new home – some minor, and some that present serious restrictions or obstacles to the use and ownership of the property.
What Is Title Insurance?
With so much at stake, having title insurance provides an extra layer of protection and peace of mind. Before you purchase insurance, the insurance company performs a title search to look for any potential title defects. You can then work with the seller to clear up these defects. Based on the title search, the insurance company may offer you certain terms and rates on a title insurance policy.
The policy will specify what title defects they will cover and whether there are any exclusions that that they won’t cover (such as defects discovered but not resolved). A few key title insurance terms include:
- Lender’s Policy: When you take out a loan to buy your house, the house is used as security for the loan. So, many lender’s will require you to get a lender’s title insurance policy since title defects can affect the ability of the house to be used as security. A lender’s policy only covers the amount of the loan you have outstanding, so it leaves you without coverage for value of the home on top of that outstanding loan.
- Owner’s Policy: This covers whatever the value of your home was when you bought it, so it affords more protection.
- Inflation Rider: Hopefully, the value of your home goes up over time. An inflation rider adjusts your insurance coverage amount to reflect that increase in value above the purchase price amount.
What Does the Insurance Company Do If I Have Title Issues?
Under title insurance, the insurance company agrees to protect you against certain problems that weren’t discovered in the original title search, but which occurred before the policy went into effect. Therefore, title insurance won’t cover title defects that originate after you buy the house, like a mortgage lien that your own lender obtains against you five years after the closing date.
So, for example, someone may claim they were given an easement across your property 12 years before you bought your house. The title insurance company will cover the cost of defending you against the claim, costs to fix the title issue, and loss in the event you lose title or rights to the property (subject to limits in your policy).
Get Professional Help Defending the Title to Your Home
After you’ve worked so hard to save up and buy a home, issues with the title can be a huge headache. Whether you’re working through title problems before the closing, or dealing with claims against your ownership years later, an experienced lawyer can be instrumental in defending your rights. Contact a local attorney familiar with title insurance issues today.