What is Title Insurance?

Simply stated, the title to a piece of property is the evidence that the owner is in lawful possession of that property. 

Insurance such as car, life, health, etc., protects against potential future events and is paid for with monthly or annual premiums. A title insurance policy insures against events that occurred in the past of the real estate property and the people who owned it, for a one-time premium paid at the close of the escrow. 

Title insurance protects against claims from defects. Defects are things such as another person claiming an ownership interest, improperly recorded documents, fraud, forgery, liens, encroachments, easements and other items that are specified in the insurance policy. 

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Buyers and lenders need title insurance in order to be insured against various possible title defects. The buyer, seller and lender all benefit from issuance of a title insurance policy. 

Because title insurance protects both home buyers and lenders, there are two types to suit the end user’s needs:

• A lender’s policy is generally required when a lender issues a mortgage loan. The loan policy is usually based on the dollar amount of the loan and it protects the lender’s interests in the property should a problem with the title arise. It does not protect the buyer. The policy amount decreases each year and eventually disappears as the loan is paid off.
  
• An owner’s policy, purchased at closing, provides coverage for the homeowner. It is usually issued in the amount of the real estate purchase and is valid for as long as the owner or his heirs have an interest in the property. Only an owner’s policy fully protects the buyer should a covered title problem arise with the title that was not found during the title search. Possible hidden title problems can include:
  
  • Errors or omissions in deeds
    
  • Mistakes in examining records
    
  • Forgery
    
  • Undisclosed heirs
    

There are two types of owner’s title insurance policies certified by the American Land Title Association® (ALTA®):

• The owner’s policy protects you from defects and liens in the history of your title through the date and time your deed is recorded in the public records.
  
• The homeowner’s policy takes your protection to a higher level by providing coverage for many additional risks, including some that might occur after the deed has been recorded. The Homeowner’s policy protects against many common, frustrating problems, and the policy protects your investment for as long as you or your heirs own the property. 
  

State laws and customs vary on who pays for title insurance, but here’s who generally pays for title insurance:

• Home buyers typically cover costs for lender’s title insurance as they are the one who is taking a loan from the mortgage lender.
  
• The person who pays for owner’s insurance can vary. Sometimes, the seller could pay for the title policy as an offering to help with the sale of their property.
  

For more information on laws and customs in your specific state, download our State Laws & Customs Toolkit.

After the escrow officer or lender opens the title order, the title agent or attorney begins a title search. A Preliminary Report is issued to the customer for review and approval. All closing documents are recorded upon escrow’s instruction. When recording has been confirmed, demands are paid, funds are disbursed, and the actual title insurance policy is created. 

Escrow refers to the process in which the funds of a transaction (such as the sale of a house) are held by a third party, often the title company or an attorney in the case of real estate, pending the fulfillment of the transaction.

The Owner’s Policy insures the new owner/home buyer, and a lender’s policy insures the priority of the lender’s security interest.