What is Title Insurance?
Title insurance is an insurance policy that protects lenders and borrowers against financial loss from past defects or problems with the ownership of a property. Those problems usually include third-party claims on the property such as back taxes, conflicting wills, fraud, forgery, or even a construction company that did not get paid for its work on the home under a previous owner.
These defects in a title can result in additional costs in the future for the new property owner or even invalidate a buyer’s right to ownership of a property. That is when title insurance policies come into play, to cover the insured party for any covered losses and legal fees that might arise out of such problems.
Typically, before a loan closes the lender will request a “title search” from a title company. The title company looks for public records related to the property to try to find any defects.
In other words, the title search involves digging through public records such as court documents and deeds to verify that the current owner of a property is, in fact, the legal owner and has the right to sell it. If by any chance, the title search reveals any defects, the title company will try to resolve them.
The most popular title companies in the United States are:
- First American: headquartered in Santa Ana, California.
- Fidelity National Title Insurance Company: headquartered in Santa Barbara, California.
- Old Republic National Title Insurance Company: headquartered in Tampa, Florida.
Understanding Title Insurance
Imagine a scenario where you purchase a house. You move in, life goes on. Until about a year after the sale, a gentleman knocks on your door demanding to know why you are living in his home. Turns out the gentleman’s son was supposed to be caring for the house while he was working overseas. Instead, the son forged his father’s signature, sold it, and kept the money. The forgery was facilitated by the fact that the son was a junior so the name on his ID matched all the legal documents.
The title insurance policy covered the father for the value of his home and the issuing title company pursued monetary restitution from the son for the money he received after he illegally sold his father’s house.
Types of Title Insurance
There are two types of title insurance- owner’s title insurance (an Owner’s Policy), which protects the buyer, and lender’s title insurance (a Loan Policy), which protects the lender. Almost all lenders require the borrower to purchase a lender's title insurance policy to protect the lender in the event the seller was not legally able to transfer the title of ownership rights.