According to the Consumer Financial Protection Bureau, most mortgage lenders require borrowers to purchase an owner’s title insurance policy, and for good reason. Title insurance protects real estate owners in the event that a party sues and says that it has a claim against the home from before the homeowner purchased it. Common claims often come from contractors who have yet to be paid for the work they performed on the home and from the IRS for the previous owner’s failure to pay taxes on the property. Even if your lender is one of the few who does not require you to purchase this protective policy, you should still invest in one, as it could prove to be the only way to protect your financial investment in your home.
The Purpose of Title Insurance
As we explained above, owner’s title insurance protects the insured from a loss related to the ownership of the property. There are two types of title insurance of which you need to be aware: lender’s coverage and owner’s coverage. Lender’s coverage protects the lender’s investment in the home and is required. Owner’s title insurance, however, protects the homeowner’s interest (yours) and is optional. Both lender’s and owner’s title insurance are one-time, up-front costs, and not monthly premiums you pay along with your mortgage each month.
Of course, homes do not just go on the market without a thorough title search being done. When a person is in the process of buying a new home, several entities are involved. One such entity is the title search company. The title search company will check a property’s ownership history to ensure that the title is “clear,” or free of claims against it. Claims may be in the form of a levy or lien from a creditor, lender, or the government. The latter party may place a levy or lien on a property if the past owner failed to pay his or her taxes.
If the research company fails to find any outstanding title defects or open claims, you may wonder why you should purchase title insurance. Bluntly stated, mistakes happen and oversights occur. An ancient issue could have disappeared several owners back but may resurface during your period of homeownership. There may be an issue with a previously unknown heir, or a pending legal judgment or lawsuit. Fraud may also cause a title issue to arise.
In the best-case scenario, a title issue after closing could result in extensive legal costs and stressful litigation. In the worst case, it could mean you lose your property and any money you have invested in it.
Why You Need Title Insurance
If the seller offers you a warranty deed, which states he or she is transferring ownership of the property over to you free and clear of any liens, you may think you are off the hook for claims against your home. This is not the case. As soon as the seller transfers the deed, it becomes the lender’s and the risk associated with it the insurance company’s. The insurance company protects the lender, not you. Even with the warranty, you are subject to the same risks as you would be without owner’s title insurance.
Work With a Alabama Real Estate Attorney
When purchasing a new home, it is always wise to work with a knowledgeable Birmingham real estate lawyer. A lawyer can help you avoid any pitfalls associated with the purchase process and that you take all the necessary steps to protect your real estate investment—including advising you on your purchase of owner’s title insurance. To consult with a real estate attorney today, contact Cloud Willis & Ellis.