Buying a home is the biggest financial commitment most people will ever make, and it is essential to protect that commitment as best you can. Title insurance is designed to protect the homeowner from future claims others may have on the property they own. There are a number of individuals and agencies that could have a claim on the home, so it is vital to carry title insurance.
The title policy will be part of the closing document package you receive, and in most cases that policy will be right at the top of the stack of paperwork. Title insurance protects the home against claims by government agencies, contractors, lenders, heirs and relatives of the seller, etc. Even if the title company did its due diligence, there is always a chance that something could come up in the history of the property.
During the loan process, the title company will do a search of all available records concerning the property being purchased. This search may uncover such things as unpaid tax liens, mortgages with outstanding balances, unpaid contracts from earlier sales, and legal judgments. In addition, there may have been easements or restrictions placed on the property, or documents that may have been signed by someone with an expired power of attorney. If any of these issues come up, the title company will be able to work them out by the closing. If the title company is unable to provide a clear title it could scuttle the sale of the property.
The purpose of title insurance is to protect the property in the event of defects that were not known at the time of the closing. If any such defects are found, the title insurance policy will cover those claims according to the terms of the policy.
During the loan approval process, the buyer will receive a copy of the preliminary title report, and that report will say that the title company is prepared to issue a title insurance policy. The report will provide the amount of coverage and the cost of the policy, in addition to a legal description and a list of any areas that may need to be cleared. The report will show who is legally vested in the property, and it is important for the buyer to address any concerns with the title officer.
It is up to the buyer to read and understand the title insurance policy. Until the closing of the loan, the buyer will not have a full copy of the policy, only the preliminary report. It is important to have a good grasp of the amount of insurance being offered, and of the terms and price of that insurance coverage. If anything in the report does not make sense, it is up to you to address those concerns and have any questions answered to your satisfaction before the closing.