Dear Ray,

I’m buying my first home, and I’m told I must have title insurance. 

Why do I need title insurance? What does title-insurance coverage protect?

— S.T.

Title insurance protects you against a loss on your home or land due to a defect in the title. The most confusing thing about title insurance is there are two types of title insurance: an owner’s policy and a lender’s policy of title insurance. The owner’s policy protects you; the lender’s policy protects the lender. 

If you’re purchasing a home all-cash, with no mortgage loan, then you will have just one policy: the owner’s policy of title insurance. If you’re purchasing a home and there will be a mortgage, then you’ll need to have a lender’s policy of title insurance, as well. 

Title insurance protects you from problems with the home’s title. At closing, you will receive a “clean” title, with no inaccuracies, liens or debts, typically referred to as a “cloud” or defect on the title. 

Title insurance guarantees that the ownership of your new home has been researched, going back many years, and tracing the chain of ownership right up to you. In doing their research, the title company usually finds about one-third of properties have some problem on the title. Any problems with the title must be fixed before the title is transferred to you. (Your real estate Purchase & Sale Agreement stipulates that a clean title will be delivered to you at closing.)

Problems commonly found on title include mechanic’s liens, where an owner has had some work done on the home but never fully paid the contractor. Tax liens for local, state or federal taxes that are owing are common. Also common are unpaid homeowner’s dues or liens for unpaid child support.

Other problems with a home’s title include deceased and divorced individuals who have not been removed from the title after a death or divorce. Heirs who are selling a home may have an undisclosed federal-tax lien or court judgment, which can be missed during an initial title search. There can be conflicts involving spouses and heirs after a death, when the estate is not settled. 

There are instances where fraud or forgery may be involved somewhere in the chain of title. A deed signed by a seller who is in bankruptcy may be voidable. 

The list of potential title problems is lengthy. 

Protecting yourself, lender

The Owner’s Title Policy will cover you in the event that a public-records search missed problems on the title. It’s insurance against most unforeseen problems, omissions, undisclosed heirs and errors or mistakes in issuing the title in your name. 

Title insurance covers attorney fees and court costs. The Owner’s Title Policy will stand behind you and your heirs, for as long as you own the property, with monetary and legal assistance to handle any claims for a covered title problem that arises after the closing of the sale. 

Your Owner’s Title Policy is a one-time fee, which is paid by the seller at closing. (An ALTA Owner’s Policy is the standard of the industry; ask your Realtor to review the Purchase & Sale Agreement to make sure you’re receiving an ALTA policy.)

The second type of title insurance is the Lender’s Title Policy, or the Loan Policy. If you’re taking out a mortgage to buy your home, then you’ll be required to have a Lender’s Policy of Title Insurance. 

The lender’s policy is usually based on the loan amount, and it only protects the lender’s interest in the property should a problem with the title arise. The lender’s policy coverage decreases as the mortgage balance declines and eventually disappears when the mortgage is paid off.

People sometimes complain about the cost of title insurance, but it’s a necessary part of owning real estate. A source of aggravation for many homeowners is the need to pay for a new Lender’s Title Policy each time you refinance your mortgage. Even if you’ve only owned your home for a year or two, you could have acquired a lien or judgment or gone through a divorce. With every new mortgage, the lender will require a new policy to protect their interest. 

You may qualify for a discounted rate on the lender’s policy, so be sure to ask.

RAY AKERS has been a licensed Realtor for more than 25 years and is a lifelong Seattle resident. Send your questions to ray@akerscargill.com or call (206) 722-4444.