This is one of the most commonly asked questions we receive from homebuyers, whether it be a first time homebuyer, or those that have bought and sold more than a couple homes in their life.
The short answer: A title company is kind of like a knight who protects your ownership in the property. You purchase title insurance from the title company, and it provides you with protection against loss or damage from any future claims people may have against your homeownership of the property.
Of course, title companies do more than just sell you title insurance, but this is probably the most important benefit to you as the buyer.
How about some examples
For example, let’s say after you purchased your home someone shows up claiming he actually owns the home, because his Uncle Joe who owned the home prior to you gave it to him according to his last will and testament. In a scenario like that, there’s likely going to be a lawsuit, and the title insurance would cover your legal expenses to protect you in this scenario.
Here’s another, more common example. Let’s say you close on your home, and a couple months later you start receiving letters from a contractor that did work on the home for the previous owners when they lived there. The letter states they’re placing lien on the home, because the invoices are still unpaid. Again, your title insurance policy will protect you in this situation.
When you’re under contract to purchase a home, it’s the title company’s job to ensure there’s no one else that can make such claims against the property before your closing. They do this by performing a title search.
This search can’t possibly uncover every defect, because they only have the ability to search publicly recorded documents. If they find a defect, then you’ll have the opportunity to remedy that before closing on the home. If a defect isn’t found (regardless of why not), and you purchase title insurance, you’ll be provided with protection against others that claim your home is their property.
Common Defects/Issues a Title Company Protects Against
- False impersonation of the true owner of the property
- Documents signed/executed by invalid or expired powers of attorney
- Claims resulting in the use of aliases or fictitious names by someone earlier in the chain of title
- Undisclosed heirs who surface years later
- Forged documents (deeds, wills, etc.)
- Unpaid mechanics liens (when a contractor does work on the home and doesn’t get paid)
- Liens for unpaid inheritance, estate, income, or gift taxes
- Misapplied tax payments
- Misinterpretation of wills, or discovery of a later will after going through probate
- Deed by persons of unsound mind, minors, or a married person representing themselves as single
- Undisclosed divorce by someone who conveys title of a deceased former spouse
- Mistakes in recording a deed, or deeds recorded but not properly indexed or made discoverable in a title search
- Deed to or from a corporation before incorporating or after losing a corporate charter
- Disputed or fraudulently obtained release of a mortgage document
Nearly every mortgage lender requires you to have a title insurance policy, if you’re using a loan to purchase your home. Some cash buyers and investors choose to forgo purchasing title insurance to save just a few bucks at closing. This is not a good idea. Especially, for investors purchasing distressed properties.
Distressed properties have the word distressed in their description for a reason. They not only usually require work, but many of the previous owners are either disgruntled, can’t be found, or owe a lot of people money. The chances of someone claiming liens or other ownership of the property after you close are very high.
So, unless your property is worth less than a couple thousand dollars, we highly recommend purchasing title insurance. Without it, the cost to protect your ownership in that property could easily exceed what it’s actually worth.