What is Title Insurance and Why is It Important?

By Kurt Real Estate Oct 26, 2021

Title insurance comes in two forms: lender’s title insurance and owner’s title insurance. The lender’s title insurance is paid for by the buyer in a real estate transaction and protects the lender and homebuyer from any defects in title. Owner’s title insurance is typically paid for by the seller to protect the buyer’s interest in the property.

Though every real estate transaction requires clear title in order for title to be transferred, sometimes there are missing items (like building code violations) that may not come up during the title search but can affect the buyer later on after the close of escrow. Because of this, lenders and buyers need protection from any loss or damages resulting from such “blemishes” on title.

An example would be a seller spends $20,000 to build a custom pool in the backyard. The seller paid the vendor the $10,000 deposit but they have not paid the vendor the balance owed and a mechanics lien is not yet showing up on the title search. If a mechanics lien is placed against the property for the $10,000 owed, that could become the responsibility of the new homeowner without title insurance.

Once escrow is opened, the title company will run a search for any clouds on title and any liens or encumbrances will be need to be addressed prior to the close of escrow. For example, say a seller has unpaid property taxes dating back a few years. These defaulted taxes along with any mortgage lien on the property would have to be paid off with the proceeds of the sale prior to the close of escrow in order to convey clear title to the buyer.

During the escrow process, the escrow officer will initiate the insurance process. Often, lender’s insurance and owner’s title insurance are both required to ensure all parties are adequately protected. The cost of owner’s title insurance can range from around $500-$3500+ depending on the location and price of the home.

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Source: https://www.investopedia.com/terms/t/title_insurance.asp