What is Title Insurance?
When applying for a mortgage for the first time or refinancing an existing mortgage, title insurance is a fee you will see on your loan estimate. In short, it protects the insured from a financial loss related to the ownership of a property. The lender will require title insurance which is paid by you (the borrower) to protect their legal ownership of the property. Keep in mind, lenders title insurance will only cover the lender - not the borrower.
However, there is owner's title insurance which is an optional policy that does protect the borrower. Furthermore, if you had purchased owners' title insurance upon your home's purchase, it's not necessary to buy it again as it will last as long as you or your heirs own the property.
What is the purpose of Title Insurance?
The primary purpose of title insurance is to protect the lender from unforeseen ownership issues. Unlike traditional insurance which provides protection in case something should happen in the future, title insurance protects the lender should something occur from the past. Although the title insurance company will do a thorough search on the property to be sure it's "free and clear” meaning no liens or encumbrances could be found, sometimes liens or claims can arise that were not showing on the initial title search. If any of these events should occur, the insurance will cover the costs associated with the claim.
What does title insurance cover?
Title insurance will cover any third-party liens that could emerge from prior owners such as unpaid taxes, construction/mechanics liens, conflicting wills, boundary or survey disputes, unknown easements, false impersonations, forgeries, illegal deeds, or even an unknown heir looking to take claim to the property many years later.
Bottom line: Title insurance is an important part of the mortgage process and a lender requirement to protect their asset. Although owner's title insurance is an additional option for you (the borrower), it might be a good idea to invest in it to be sure you too are protected. If you have additional questions about title insurance, reach out to your loan officer who can provide more detail and suggest the best options for you.