According to Investopedia, title insurance is “a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in the title to a property.” (I didn’t understand that at first either.)
In plain speak, title insurance protects new homeowners from being on the hook financially for issues that happened before they bought the property.
“What kind of issues?” you may ask. Title insurance protects you – after you buy the house – from bearing the financial burden if these types of issues are uncovered:
- Back taxes – if the property taxes were unpaid, the state can file a claim to collect the outstanding taxes from you, the new homeowner
- Liens – if the former owner owes money to creditors, a legal claim against the property allows them to collect what’s owed from the new homeowner
- Unknown heirs – there could be conflicting wills or an unknown heir, such as a child out of wedlock, could come forward with a claim of ownership
- Survey errors – your new neighbor may dispute the boundary lines of your new home
- Filing errors – mistakes, such as typos or incorrect filings of court documents
- Forgery – unfortunately, falsified documents do happen
To avoid this, real estate transactions involve a search of public archives to confirm the property’s legal ownership. When the title search comes up clear, it means there are no issues filed against the property’s title that could dispute ownership and jeopardize the impending closing.
If the search does uncover an issue, it can slow down the closing while things get sorted out, but at least you aren’t financially at risk. The current owner is responsible for resolving the issue. And if they don’t, you can walk away from the deal.
The real problem comes if one of those “things” arise after you’ve bought the house. It doesn’t happen often, but if it does, you’ll really be glad to have the protection of title insurance.