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What is Title Insurance and Why Do I Need It?

Before you go into a closing, it’s critical to know that your title to the property will be free and clear. This means that, after the closing, it will be free of prior indebtedness or other defects or encumbrances. It is then what is called a “marketable title.”

Normally at the closing the seller gives the buyer a deed, which transfers the title to you and warrants your title against claims of other persons. However, you should not accept a deed without having your attorney, or someone approved by your attorney, conduct a thorough title examination of the property.

This involves researching public records for previous owners of record, prior deeds, mortgages, court judgments, probate proceedings and divorces, foreclosures, tax and construction liens, and other matters that could affect title — in other words, the legal history of the property. In some cases, this process will uncover title defects that could jeopardize a buyer’s ability to take clear title.

If research reveals title defects, the seller may be asked to undertake legal proceedings to clear the defects. Of course, you’d want to follow these proceedings closely with your attorney.

There are also hidden defects, which may not surface even in the course of a thorough title examination. One of these could put your ownership in question, even after you’ve closed. Some examples of defects, both obvious and hidden, include:

Lost or forged deeds
A married signer who represents himself/herself as single
Claims of undisclosed heirs
Impersonation of another
Clerical error at the courthouse when earlier documents were recorded
Incorrect legal description
Instruments signed by minors or mentally incompetent persons
Title taken as a result of an improperly probated will
Confusion of title resulting from similar names.

The point of title insurance is to secure your claim to property and protect you from a hidden defect. If you’re forced to defend your title in court, the insurer agrees to pay the costs.

Your lender will insist on title insurance in the amount of the mortgage loan, but a lender’s policy or mortgagee policy doesn’t protect your ownership interest. You need an owner’s policy for that.

The owner’s title insurance policy is an agreement that the insurer will pay all losses involved in any claim covered by the policy terms. The policy provides two types of coverage: 1) If someone contests your insured title in a legal action, the insurer will defend the title at no expense to you; 2) If there is a defect in your title which cannot be eliminated, title insurance protects you from financial loss. That is, you’ll be reimbursed up to the amount of the policy — generally, the full amount of your loss.

You pay a modest, one-time premium for title insurance, and the protection continues in effect forever, even after you sell your home. The policy is issued in an amount equal to the purchase price of the property or its market value.

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