I asked Debbie Swain at Chase Legal Title: Why should people get title insurance?

“Title insurance protects what most would consider their largest and most important investment they will ever make,” Debbie says. Title insurance helps protect your real estate investment.

Lenders will take care to make sure they minimize their risk when lending a buyer money; they check your credit to determine your ability to repay a loan. They also require that the title be acquired correctly and safely. Policies set by the lender protect their interest in the event there is an unknown title defect or other problem that arises after the lender agrees to lend the buyer money.

The lender requires a title insurance policy to cover their risk, but it is paid for by you. ”Remember, this is a lender’s policy,” Debbie says. “It’s at your expense but it doesn’t cover your interest.”

Here’s an example:

You purchase a home for  $100,000.00

You apply for an 80% loan, with a 20% down payment.

$100,000.00 (cost)
-80,000.00  (lender expense)
$20,000.00 (your expense)

The lender acquires title insurance (paid by you as part of your fees) which protects their $80,000. Your $20,000 is not covered by the lender’s policy.

Imagine, in this scenario, that matters arise after closing that affect the prior ownership of the property and title. Your lender is protected by their title insurance, but you must defend your $20,000 interest in the property. You would have to take on the financial burden of legal defense, and if the defense is unsuccessful you could lose your property. The lender is protected by their title insurance, even if legal defense isn’t successful.

“The lender’s expense of $80,000 is protected by the lender’s policy even though the legal defense was not successful. The title insurance company pays the lender’s loss and then can take an assignment of your debt. Now you will make your payments to the title company,” Debbie says.

Meanwhile, your $20,000.00 is not protected — you have to continue to spend the money needed to clear the title, and who knows how long that can take?

Title insurance is a one time cost. But it protects your interest for as long as you own the property. Debbie says, “Keep in mind, as you make mortgage payments, the interest the lender has in the property goes down. But the interest you have goes up. In other words, the longer you own the property the more equity you have to risk if your title is not insured.”

So now you’re thinking: How can there be a problem with my title if the title company searched the records and was willing to issue a loan policy to the lender?

Yes, a very careful examination of the property is done before the title company issues a commitment to anyone. This doesn’t insure that a problem could exist that isn’t disclosed through a search. There can be other problems other than matters of public record. Debbie gives some examples of the types of problems that could exist but are not found on public records.

• False impersonation of ownership
• Forgery of legal instructions, such as deeds, wills, satisfactions, powers of attorney
• Undisclosed or missing heirs
• Instruments executed under an invalid or expired power of attorney
• False marital status on deeds
• Deeds by minors
• Deeds by persons of unsound mind
• Mistakes in recording of legal documents
• Liens due to unpaid estate, inheritance, income or gift taxes
• Fraud

Remember the Erpenbeck scandal?  That is just an example of fraud with real consequences for home owners.

“When you purchase an Owner’s Policy of Title Insurance,” Debbie says, “you can have the confidence of knowing your policy will pay for defending against any lawsuit that could arise.”

Debbie says Chase Legal Title will answer any questions you have about title insurance. And I can always help you understand why you want to get this policy. Your home purchase is possibly the largest purchase you will make. You want to make sure it’s safe.

More at AmyBSells:

Previous entry about Title Insurance.

More on the web:

Wikipedia: Title Insurance in the United States.

About.com: Title Insurance Policies

Related...

• November 18, 2009 -- 73 Reasons to Get Title Insurance