The most expensive thing you own, what is it? Is it insured?
ONE of the most expensive items you will own that I know you are going to have insured is going to be your car. Well, by law it’s required to at least have liability insurance but if you are making payments on your car, you have got to have full coverage as well. Now probably the most expensive thing you will own is going to be your house and if you’re making payments on it, you’re going to have two kinds of insurance on it, fire and title insurance.
So fire insurance, or hazard insurance as it’s also known, is in case your house gets damaged. It is called fire insurance because fire is the biggest danger to your house and it is there to pay out for damage or loss due to fire but in actuality can cover for other types of damage as well (check your policy for complete coverage details).
But what is title insurance? Title insurance is to protect your ownership interest in a home. I will explain in a roundabout way.
Let’s say you’re going to buy a used car. Whether it’s from a dealer or a private party, once you’ve paid for it, you’re going to get the car, the keys and most importantly the title, that piece of paper that actually gives you ownership of the car. If the seller has title to the car in-hand, there’s usually no question that the seller is the owner. The seller signs the title over to you, you take that to the DMV and after an eternity, your ownership of the car is official. If the seller has the actual title to the car, there’s typically no question that the seller is the actual the owner of the car. It’s straightforward and simple.
When buying a house, it’s not that simple. A house can be hundreds of years old and had dozens and dozens of owners, owners who are husband and wife, or several members of a family all on the title, joint tenant owners, owners who are tenants in common… There’s a chance that way back when, someone’s interest in the property wasn’t properly recorded and released. That person could come out of nowhere and claim ownership to the property. Or maybe there was a loan on the property that wasn’t fully paid off before it was sold. That lender could come back and foreclose on the property! But wait, that’s not all, there could be liens on the property from contractors who didn’t get paid, boundary issues with a neighbor, easements… all kinds of “title defects” on a property that could jeopardize clear and unquestionable ownership of a property. Title defects can make selling a property difficult or impossible.
Would you want to buy a house with title defects? I didn’t think so. This is where title insurance comes in. Title insurance is basically a guarantee that you get clear title to a property. How they do that is by thorough research. Title insurance companies will trace back the transfer history of a property all the way to its original owner to verify that each transfer matches up all the way to the current owner. They will check to see all the loans ever issued on the property, old and current. And for old loans, see if they were paid off or not. They will also check on anything else recorded on the property, like liens, easements, etc. and of course verify basic property information like legal description, address, size, etc..
After all this research, the title company will issue a preliminary title report and a commitment to issue a policy of title insurance. This insurance policy will protect the buyer from defects in the title. It’s important for the buyer to review the preliminary title report as part of their due diligence and find out about anything they don’t understand.
There are actually two types of title insurance, one to protect the buyer and the other for the lender, if the buyer is financing the purchase of the house. These are separate policies and typically not overlap. Here in the LA area, it’s customary for the seller of the property to pay for the buyer’s policy while the buyer pays for their lender’s coverage. It’s a one time fee, usually a percentage of the purchase price of the property that is paid for through escrow and made effective at close of escrow.
So what is title insurance? Title insurance is an insurance policy issued to protect your ownership of a home. You’ll want this for your own peace of mind.