Borrowers often ask me if they should purchase title insurance when buying a home. I always recommend that they speak with their attorney so as to make an informed decision. I have always purchased title insurance on the properties I have purchased as I am a believer in insurance as a foundation to any solid financial plan. Why do buyers question purchasing title insurance when the risk of loss is so high? After all, no one seems to question the need for homeowners or rental insurance. I believe the reason is twofold: (1) buyers do not understand the benefits of purchasing it, and (2) title insurance is unlike other types of insurance in that it covers issues that have already happened.
Indeed, there is a long list of risks covered by title insurance, but basically what the buyer is hedging for are the unknown or hidden hazards that might jeopardize his or her ownership in the home. Hidden hazards may include:
- Liens that were not revealed in title exam or made known to settlement agent prior to closing. Normally, a title exam reveals any liens on the property which need to be paid off and released prior to closing. If, however, the title examiner overlooked a judgment, tax, or mortgage lien on the property or failed to note it in the title exam, the buyer would be liable to pay the lien incurred by the previous owner.
- Boundary line issues that an accurate survey would not reveal.For example, if a survey failed to note that a neighbor’s shed encroached on the purchaser’s property, title insurance would cover the cost of removing the shed and resolving any accompanying boundary line dispute.
- Forgery or lack of authority. If there was a forged signature on the deed in the chain of title, or a person or corporation signed a deed without authority to do so, the transfer of ownership to the buyer would be in question.
- An unknown heir of a previous owner came forth to claim ownership in the property. For example, suppose a seller passed away and his three children sold the house to a purchaser. If an unknown fourth child later came forth to claim his quarter ownership in the house, the purchaser’s title to the property is in jeopardy.
- Instruments executed under an expired power of attorney.
- Mistakes in the public record at the county in which the property lies.
While lenders mandate that owners purchase lender’s title insurance (which only protects the lender’s interest in the property), homeowner’s title insurance is completely optional. It is a one-time fee that covers the owner for life.