What is Title Insurance?
Title insurance is a policy that covers third-party claims on a property that don't show up in the initial title search and arise after a real estate closing. A third party is someone other than the property owner, such as a construction company that didn't get paid for its work on the home under a previous owner. The term title refers to someone's legal ownership of the property.
A title claim could arise at any time, even after you've owned the property with no problems for many years. How could this happen? Someone else might have ownership rights that you don't know about when you make an offer to buy a property. Even the current owner might not be aware that someone else has a claim on the property. In the case of an overlooked heir, even the person who has those rights might not know they have them.
Before your home loan closes, your mortgage lender will order a title search from a title company. The title company searches for public records related to your home to try to find any title defects: liens, easements or encumbrances that could affect the lenders or buyers property rights.
Liens can get placed on the property by a contractor, tax authority or lender who hasn't been paid. You don't want to get stuck paying a previous owners unpaid bills.
Easements are someone right to use your property even though you are the owner. For example, if there are utility lines in your backyard, the utility company will have an easement that allows them to access your property if they need to work on the lines. The easement could limit your ability to use your property however you want.
Encumbrances include liens (also called financial encumbrances) as well as easements, but also include zoning laws, restrictive covenants imposed by homeowners associations and leaseholder rights.
The public records a title company searches include deeds, mortgages, divorce decrees, court judgments, tax records and child support orders.
If the title search reveals any problems (also called clouds), the title company will try to resolve them. In some cases, your real estate agent will need to work with the sellers agent to get the seller to resolve the problem. In other cases, the problem may be significant enough to derail the sale.