Title Insurance: The Basics
Title insurance is a type of insurance that protects a property owner from financial loss resulting from issues involving a property's title, or the legal rights to that piece of property. Without title insurance, property owner may be left vulnerable to a variety of title issues, including liens, encumbrances, and past title fraud on behalf of previous property owners.
Risks of Not Having Title Insurance
While we just reviewed some of the major legal issues that can affect a property's title, let's go a little bit more in depth. Specifically, title insurance can usually help protect you from issues including:
- Liens: When there is a lien on a property, it means that a creditor can potentially seize the property if the creditor's debt continues to go unpaid. Liens can be placed on properties by lenders (i.e. a bank lien on a home), the state or federal government (i.e. a state tax lien on a commercial property), or by unpaid contractors (i.e. a mechanic's lien).
- Encumbrances: These are legal rights or interests in a property that do not prevent passing the title on to a new buyer, but could significantly diminish the value of the property. In many cases, liens count as a type of encumbrance, but encumbrances can also include easements, which may allow other parties (such as a utility company) to use part of your property, and often in a way that you might not like.
- Title Fraud: While title fraud is somewhat rare, it can still be an expensive hassle to deal with. For example, the seller of a home may have attempted to conceal that their ex-wife or ex-husband was also on the title of a home, and not having given the ex-spouse their due share of the proceeds, the ex-spouse could attempt to claim all or part of your property.
Title Companies Will Perform a Title Search First, Then Issue Insurance
Before issuing a title insurance policy, a title company will first perform what's called a title search. During the title search process, they'll examine state, local, (and sometimes federal) records in an attempt to determine if there are any potential issues with the title of the property you want to purchase. However, even if they find out that everything's clear, you'll still want to get that title insurance policy; title issues are known to come out of the woodwork months, years, or even decades later-- and it's much better to be safe than sorry.