During a property sale, the title company will perform a search, combing public records to verify the property’s chain of ownership and any issues that might affect whether title can be transferred to another owner. You wouldn’t want to purchase a home only to learn that the seller didn’t have the right to sell it to you or that the property is subject to liens for unpaid taxes.
This due diligence usually catches any problems and enables the seller to present a clean title of ownership. But what if the title company misses something? That’s why title insurance was created.
Title insurance comes in two flavors: the lender’s policy and the owner’s policy.
As the name implies, the lender’s title insurance policy protects the amount they let you borrow. This policy goes with the mortgage, so if you refinance, you’ll need another one.
The owner’s policy stays with the property and protects you, the owner, if someone makes a legitimate claim to your house.
Most lenders require that you purchase a lender’s policy, but owner’s policies may be optional, depending on your location. Who pays for these policies—buyer or seller—is subject to negotiation or may be established by normal business practices in your area.
Is it likely that a contractor will emerge and claim you owe him thousands of dollars that the previous owner didn’t pay? Probably not. But that’s the nature of insurance—it’s a waste of money until it’s not.
Different states have different regulations regarding title insurance. Check with your mortgage company to understand what you’re required to purchase and the best options for your situation.