What is Title Insurance & Why Do I Need It?

The Washington Post recently had a helpful article on why Title Insurance is helpful for protecting your investment.   In short,

Fundamentally, title insurance is intended to protect the insured from risks associated with defects in the ownership of the property. These defects can result in total losses such as in the case of a defective foreclosure, forgery or impersonation, where no title is legally conveyed. Other defects can be partial in nature, such as where a neighbor’s garage or fence encroaches on the insured person’s property. In those cases, title insurance might pay for the removal or relocation of the encroachments.

Most buyers don’t give title insurance a 2nd thought, but savvy buyers know that there is a difference between marketable title and insurable title, and are sure to ask their settlement company whether they have found any defects that are being “insured over.” This is why it’s critical to hire your own company to do the title search when you’re buying a foreclosure or a home with suspected title issues, and important to hire an experienced company who has experience specifically in the jurisdiction in which you are purchasing.  DC, for example, is notorious for having mess land and title records.

Most settlement companies are the ones to do the title search and issue the title insurance policies.  It’s usually the largest item on the HUD-1 settlement statement, other than lender fees.  There is a lender policy — mandatory if you have a loan, as well as an optional owner policy, available for a relatively minimal additional amount.  Just because the title was found to be clean when you did your title search, things often come up later and can scuttle the deal when you go to sell, so I always advise my buyers to take both policies. I’ve worked with sellers who hadn’t bought the policy and believe me, they regretted it.   Additional  reasons to make this one time expenditure, as the WaPo article states:

First, even though a prudent settlement lawyer will do an exhaustive title search, that search may not uncover the very real risks present in these days of fraudulent foreclosures and/or forged documents. Second, the lender’s policy does not provide any protection for the owner in the event of a successful claim. Third, part of the benefit in a title policy is that the title insurance company assumes the legal costs to defend any claim. Without an owner’s policy, the owner must bear his own legal costs to defend any claim, no matter how frivolous.

Because of these risks, you should keep a copy of your title policy forever.  You buy it once, at settlement, but it covers you for the time you own the property and beyond.

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