Title Insurance Definition
Title insurance protects homeowners and mortgage lenders against risks involved in the transfer of ownership of a property. When you buy a home, you assume the title to the property you’re purchasing. This title comes with certain risks that you may not be able to identify when you purchase the property. Whether through error, omission, or fraud, information can be left out of the title transfer that can lead to future financial damages for the buyer or the seller.
Title insurance policies are available in two categories: title insurance for lenders, which protects the mortgage lender, and title insurance for homeowners, which protects the buyer. In most cases, title insurance for lenders is a requirement for any property ownership transaction, while title insurance for homeowners is optional, which leaves it up to the buyer to decide whether they want to purchase their own title insurance policy or not. Most title insurance companies offer title insurance policies in both categories.
What Is Title Insurance for Lenders?
Although the lender’s title insurance policy ultimately protects the lender’s interest, the buyer is usually expected to pay for this insurance policy. Buyers can do this either as part of their closing costs, or by working the premium into their mortgage payments. This category of title insurance protects the lender’s investment in the property in the event of legal challenges to the property’s ownership, as well as any problems arising from title defects such as liens, bankruptcy proceedings, and incomplete deed transfers.
What Is Title Insurance for Homeowners?
Title insurance for homeowners is similar to title insurance for lenders, but protects the homeowner themselves rather than their mortgage lender. This type of policy can protect buyers and sellers during the transfer of property, although it doesn’t have to be purchased during a property transaction; some people choose to buy homeowners title insurance when they refinance their home, or when they put their property up for sale.
This category of title insurance provides coverage in a variety of situations including:
- Title errors and omissions
- Title fraud or forgery
- Property ownership challenges
- Easements or encroachments discovered by new land surveys
- Incomplete deed transfers
- Property zoning issues
- Mortgage liens, tax liens, utility liens, and other types of liens
Mrs. Mapplethorp is selling her 12-acre farm to Mr. Danforth. The farm has been in Mrs. Mapplethorp’s family for two generations, but she doesn’t know who owned the property before that. After the sale, a relative of one of the previous property owners who lived there before the Mapplethorp family took over, claims that the land was promised to him in his grandfather’s will. This alleged previous owner was not mentioned in the property title, so in order to try to gain possession of the property, he takes Mr. Danforth to court. Fortunately, Mr. Danforth purchased homeowner’s title insurance when he bought the property, so his insurance pays for the legal fees associated with the court challenge.