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How title insurance protects both lenders and buyers

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Title insurance is a subject that often mystifies first-time real estate buyers, such as a newly-married couple buying their first home. Despite its seemingly mysterious nature, title insurance can protect the interests of both the lender and the buyer in a real estate purchase transaction. In order to understand the mechanics and benefits of title insurance, one must first understand how government agencies keep track of all transactions affecting each tract of real estate within their jurisdictional boundaries, such as a city or a county.

Conveying an interest in real property

Unlike personal property, such as a car or refrigerator, a tract of land is immovable. State governments have therefore used written records to keep track of interests in land. A written record of each transaction that affects a piece of property must be recorded at the appointed public office, usually called the register of deeds in most jurisdictions.

Given the long history of transactions that may affect a single piece of property, it is not difficult to imagine how mistakes can easily creep into the land records. No one wants to buy a piece of land that may be subject to a title defect. To solve this problem, the real estate industry invented title insurance.

What is a title insurance policy?

Title insurance policies come in two “flavors”: owner’s policies that protects the buyer’s interest, and lenders’ policies that protect the interest of the lender who has provided a loan to fund the purchase price. If a title defect appears after closing, the insurance company that issued the title policy will defend the holder of the policy against any claims arising out of the title defect and pay any damages caused by the defect.

Modern use of title insurance policies

In most modern real estate transactions, the lender will require the buyer to pay the premium on a policy of lender’s title insurance. Thus, purchasers now have three choices:

  • Hire an attorney to search for title defects, but this option is usually too expensive for most home owners;
  • Rely on the title opinion provided in the lender’s policy; or
  • Purchase an owner’s policy.

The choice is up to the purchaser, and the decision is usually driven by cost.

Most purchasers will rely on the lender’s policy, but purchasing an owner’s policy does not significantly increase the buyer’s closing costs (and most lenders will allow the buyer to add the cost of the owner’s policy to the principal amount of the loan). The safest route is to retain an experienced real estate attorney to review the commitment letter provided by the title insurance company and then decide which option to choose.