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The importance of title insurance when buying property

Most people who purchase a home end up purchasing title insurance as well. In general, lenders require a comprehensive title policy to protect their investment. For those who are buying homes financed by the seller or who are paying cash for the property, title insurance could seem like an unnecessary expense. After all, policies are typically at least $500, but may be well over $1,000 for more pricey properties. You can easily feel tempted to forgo this expense when buying real estate.

After all, you think to yourself, who really ends up needing title insurance? The truth is that it is difficult to predict when a title insurance policy will become necessary. Failing to have one on a property, however, could result in losing out on all the money you've invested in said property. Given the risk of losing your property and all investments you've made in it, the cost of a title policy is minor compared to the peace of mind it offers.

What does title insurance cover?

There are typically two kinds of title insurance: a lender's policy and an owner's policy. A lender's policy protects your insurance company from losses related to a future title issue on a property they finance. An owner's policy protects your financial investment in the event of a title issue down the road. Every time a deed gets transferred, there's potential for a future claim against title.

A lender's policy typically covers the full amount of the mortgage until your loan gets paid in full. An owner's policy covers the price of the home, which may differ from the amount financed. In addition to covering your investment in the property, title policies generally also cover legal fees and other costs associated with litigating a title issue.

What are common kinds of title issues?

There is a range of issues that can impact the title of your property. For example, a home may have been inherited by a family of siblings as part of an estate. Maybe one of them lives far away and isn't present for the administration of the estate. If three out of four siblings agreed to sell the home and split the profits, the fourth, out of state sibling could eventually have a claim against the title of the property. A title policy also protects you if a previously unknown heir steps forward to claim a property.

The sale may or may not have involved intentional fraud or falsification of the deed. Title insurance protects against fraud, mistakes in the public record regarding either ownership or past due taxes.

No matter how thorough a title and deed search was, it is still possible for critical information to get overlooked. When balanced against the cost of a lawsuit and the potential of losing your property, title insurance is often a smart investment.

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