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In every state but Iowa (where residents are covered by a state fund), homebuyers must be offered title insurance, which protects them from any problems emanating from the transference of title from past owners to new owners. Before closing, a title professional will do a search to make sure there are no outstanding taxes, liens or judgments against the property.
But even after a title professional diligently searches, things like document omissions, oversights and even forgery can cause something to be missed, or sometimes problems simply aren’t part of the public record, such as undisclosed heirs or spousal claims, which surface later. Most problems that are discovered from the initial search are taken care of before closing, but when they appear after a buyer moves in, title insurance is there to protect you.
There are two types of title insurance policies:
Lender’s Policy — This is required by lenders in order to close the loan. It protects the lender’s interest (loan amount) if any title problems surface after the owner takes possession of the home. It basically covers the mortgage amount and is a one-time purchase at closing.
Owner’s Policy — Any equity not covered in the Lender’s Policy can be covered in an Owner’s Policy. The policy will protect homebuyers for as long as they own the property. (It is important to remember that if you buy a property in your name and then quit claim it later to an LLC, etc. your policy is now over because you changed ownership. You will be without coverage unless you contact your insurance carrier first and make arrangements to transfer the coverage.) If a covered title issue arises, most owner policies cover homebuyers both monetarily and with legal defense, as the title company will fight any attack on your title.
Title insurance costs vary from state to state, as well as who is required to pick up the tab, either the buyer or seller. Title insurance must also be re-purchased each time the mortgage is refinanced.
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