What is Title Insurance? Why Do You Need It?

When you buy a piece of real estate you receive “title” to that property. The term title refers both to legal ownership and the right to use the property. Unfortunately, certain types of mistakes, or “title defects” can leave the new owner in a situation in which another party also has a valid legal claim to the real estate they purchased. Because of the risks associated with title defects, title insurance has become a mandatory part of the process of acquiring funds from a lender for a residential real estate transaction.

Despite its widespread use, title insurance is often misunderstood. Many buyers wonder what title insurance is or why they need to have it. However, the risk of title defects makes title insurance critical for the protection of everyone involved in a real estate transaction. For most Americans, their homes are their most valuable asset. Before title insurance existed the purchaser of property assumed all of the risk associated with title defects. Title insurance is about removing risk from the home buying equation. This serves a two-fold purpose: it makes the lenders and their investors more secure in their position and it also minimizes the risk to the owner.

Unlike other types of insurance, title insurance insures against defects that have happened in the past. Prior to closing, a title search is performed that identifies potential problems with title. Title insurance insures against those risks and also risks that would not come up during a title search. Despite best efforts, there are types of title defects that cannot be found by searching public records. For example, there can be mistakes in public records, improperly probated wills, improper foreclosure sales, fraudulent conveyances, or any number of a wide variety of risks that potentially effect title.

Lenders require title insurance, so you will have to purchase it if you are taking out a mortgage or other type of loan to purchase a piece of real estate. I also highly recommend to buyers that they acquire title insurance for cash transactions as well. Title insurance is only a one-time fee and tends to be a low amount compared to the purchase price. Your real estate attorney can help you get a competitive rate and coverage amount. Buyers also receive peace of mind by knowing that their property cannot be threatened by a defective title.

By Clement Law Firm, Asheville, NC -- 828-281-8160

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