You probably have a lot of things to consider when buying a home, from choosing the right neighborhood to picking the best mortgage. One thing you don’t want to overlook is title insurance. This policy protects you if there are any unknown issues that come up with the home’s title that could threaten your ownership and it’s definitely worth the cost.

What is Title Insurance?

A title policy is a one-time purchase that works differently than other types of insurance. While the risk is small and very few title policies ever pay out on claims, this policy protects you against unpleasant surprises with the title to your home down the road.

During the escrow process of buying your home, the title company will perform a title search to look for any surprises in wills, deeds, and trusts to trace the history of the property back decades. The title search will make sure that all past liens and mortgages are paid, no one holds an easement on the home, and there are no pending legal actions that can cloud the title. About one-third of all title searches find a public record or title problem that gets fixed before closing. This process helps ensure you receive a clear title to the home, but it’s not perfect. If this search misses anything, the title policy covers your losses if someone has a claim on the property.

Types of Title Policies

There are two types of title insurance and, while both protect you, they are very different. A lender’s policy is usually required by your lender. When you get a lender’s policy, the policy will pay off your mortgage if it turns out your home has an undiscovered lien. While this means you won’t be responsible for the mortgage any longer, you will also be out your home.

An owner’s policy is a separate policy. Many homeowners do not buy an owner’s policy, but real estate experts usually advise it because this policy covers all of the expenses associated with buying the home, including payments on the loan you’ve already made and the down payment. A lender’s policy only pays off the loan — it doesn’t give you anything for the money you’ve already paid out if you need to make a claim.

Owner’s policies can vary quite a bit in what they do and do not cover so it’s a good idea to shop around. The standard policy covers up to the purchase price of the home, which means you will get back the down payment and payments you’ve made.

You can choose an enhanced owner’s policy or an inflation rider to cover inflation that also covers any liens that are filed after you close on the home. This means if you buy the home and the title is clear but a subcontractor who did work on the home two years ago files a mechanic’s lien a week after you move in, the policy will cover you and you aren’t responsible for paying the lien. You can even get a restriction endorsement on your policy that protects you if construction of the home violates restrictions in the subdivision.

Title insurance covers many potential issues that can threaten your ownership like claims from past spouses and relatives, survey errors, tax liens, and mechanic’s liens, but there are some limitations. Certain situations are excluded from coverage, such as utility easements, legal roads on the property, and encroachments that were found but not fixed.

Why It Matters

When you buy a home, you want a clean title that gives you full ownership of the home. While a title search will be conducted by the title company, this search can’t turn up absolutely everything. Imagine moving in to your new home only to discover the previous owner failed to pay years’ worth of property taxes — taxes for which you are now responsible.

Past-due property taxes will almost surely be discovered during the title search, but what happens if the home was sold without getting the signature of a former spouse who co-owned the home and now wants to stake her claim to the property? Or a contractor who did work on the roof five years ago was never paid and has now put a lien on the home? In an extreme case, what if the seller wasn’t actually the owner and merely a renter posing as the owner of the home? Title issues can potentially go back decades and be very convoluted.

A title policy protects you from these unforeseen title issues with a one-time fee. No matter how extensive a title search, it will never be able to determine whether paperwork from decades ago will turn up a claim due to a misspelling or an estranged heir or relative will turn up for their claim on the property.

How to Buy Title Insurance

The only time you can buy title insurance is at closing on your home. In some areas, the seller purchases the owner’s policy and the buyer purchases the lender’s title policy but both will go into effect at closing. Your escrow agent will start the process of getting title insurance not long after your purchase agreement is finalized.

As a buyer, you have the right to buy title insurance from any company you like. You may find it more cost-effective to buy your policy from the same title company as the lender, however, as you and the lender share the same interest in ensuring a clean title and the cost may be lower.

Title insurance may cost up to $1,000, although the seller will most likely pay for at least the owner’s policy. While this can be a big out-of-pocket expense when you’re already looking at other closing costs, a down payment, and moving expenses, it’s worth it to protect your interest in the home and ensure you’re never left on the hook for someone else’s debt.

Planning to buy a home in Long Beach? At Evergreen Properties and Investments, we take pride in guiding clients through complex real estate decisions so they can make smart, informed decisions. Call today to discuss your real estate needs and get help buying a home you’ll love.

From the Author: My name is Dan Barcelon and I believe that Real Estate can be one of the most valuable assets you’ll ever own. I’m dedicated to educating and guiding my clients on how to manage and leverage their homes to create an Evergreen legacy for themselves and their family. I primarily consult both home buyers and home sellers on reaching their personal and financial goals through Real Estate in the following cities of Southern California: Long Beach,  Carson,  Cerritos,  Signal Hill,  Torrance,  Lakewood,  Cypress,  Downey,  Bellflower,  Norwalk,  Wilmington,  La Palma,  and Artesia.