Homeownership is a big part of the American dream and an essential part of that dream is knowing that the property you purchase is yours—free and clear of any past owner’s baggage. What many first-time homebuyers don’t know is that title insurance plays a key role in making that happen. If you’re a newcomer to the housing market, title insurance may be an unfamiliar concept to you—so let’s take a closer look at what it is, what it does and how it protects you and your new home.
What is title insurance?
Title insurance protects you from the unknown. Properties have histories, sometimes messy histories that may include owner disputes, unpaid taxes, liens, heirs, document forgeries and boundary disputes. When these issues arise, they are called title defects.
When title defects come to light after you purchase a home, you can be held liable. That means you could be forced to pay to satisfy liens against the property. If the property was sold to you and it later becomes clear that someone else owned the property (such as an estranged spouse or undisclosed heir), you could lose your investment entirely. Title defects could range from small annoyances to major headaches, and title insurance protects you from a wide range of potential problems.
How title defects come to light
When you purchase owner’s title insurance, the title insurance company you select uncovers title defects by conducting an in-depth title search. (Lender’s title insurance protects the mortgage lender for the value of the loan. But that provides no coverage for the buyer, which is why owner’s title insurance is so important.) This includes reviewing old records and ownership of the property. When defects are discovered, they often can be rectified prior to the sale. For example, if the previous owner had a home equity loan out on the property, they could pay the balance to clear the title. This provides an immense amount of peace of mind for the buyer, who now knows the property is theirs and there should be no unwelcome surprises down the road. However, if issues do arise—issues that for some reason did not get discovered during the title search—the title insurance company agrees to cover the expense of rectifying those issues.
Who pays for title insurance?
In Wisconsin, the seller pays for the owner’s policy, but in Minnesota, the property buyer pays for title insurance. In some Minnesota market conditions, however, you may be able to negotiate to have the seller cover the cost of title insurance. Regardless, you have the right to choose the title insurance company you want to work with. It’s worth it to do some research and select a reputable company that you trust.
Title insurance: an important step in the journey toward home ownership
As a newcomer to the homebuying scene, it’s natural to feel overwhelmed by all there is to do and all of the new terminology and real estate concepts you have to understand. We hope this newcomers guide to understanding title insurance helps you on your way, so you can make informed decisions that protect your investment in your new home.