What is title insurance?

Prior to the development of title insurance, buyers in real estate transactions bore the sole responsibility for ensuring that the title they were receiving from a seller was clear of liens, encumberances and other title defects.  As a result, many real estate transactions proceeded very slowly, as this insecurity forced prudent buyers to exhaust great amounts of time and effort ensuring that the real estate they were purchasing was free from title defects and encumberances.

In an effort to speed up the process and provide greater security in real estate transactions, title insurance was developed.  Title insurance is meant to protect an owner’s or lender’s financial interest in real property against loss due to title defects, liens or other matters.  Title insurance will defend against a lawsuit attacking title, or reimburse the insured for actual monetary loss incurred, up to the dollar amount of insurance provided under the policy.

What are some common types of title defects?

  1. Forged deeds or mortgages
  2. Unauthorized deeds (deeds by minors, insane or mentally incompetent individuals, corporate or partnership deeds without proper authorization, etc.)
  3. Deeds not properly recorded
  4. Ineffective release of prior mortgage or lien
  5. Undisclosed but recorded federal or state tax lien, judgment, prior mortgage, notice or pending lawsuit affecting land, environmental lien, covenants, restrictions and easements

Do I have to buy title insurance as part of my real estate transaction?

It depends.  Whenever a lender is involved in the transaction, they will often require that the purchaser/borrower purchase a title insurance policy up to the dollar amount of the loan provided – known as the loan policy – in order to protect their financial interest in the property.

However, the loan policy does not protect the owner’s financial interest in the property – this is why the purchase of an owner’s policy is strongly encouraged when first purchasing the property.  An owner’s policy should be purchased up to the full value of the property in order to adequately protect the owner against potential title defects.

For how long does the title insurance policy protect?

Owner’s policy – indefinitely.  As long as the owner or any of their heirs has an interest in the property, the owner’s policy will be in effect.

Loan policy – until the mortgage is terminated.  This is why lenders will require the purchase of a new title insurance policy when refinancing – because when the old loan is paid off as a result of the refinance, the title policy is terminated simultaneuosly and the lender will require a new policy to protect their financial interest secured by the new loan.

Are any discounts available on the premiums for title insurance?

Yes.  There is a significant discount available when purchasing a combination of an owner’s policy with a loan policy.  Because a lender will often require the purchase of a loan policy equal to the amount of the loan provided, combining an owner’s policy with the required loan policy allows purchasers to protect their own financial interest in the property for a relatively modest increase in the amount they would have had to pay for the loan policy regardless.

In addition, a discount is provided for loan policy premiums on refinances when the borrower can demonstrate that they have a current owner’s or loan policy that was issued within the last 10 years.  The size of the discount varies based on the size of the new loan and the amount of coverage provided under the old title policy.

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