Why You Need Title Insurance

If you’ve ever bought a house, you’ve probably wondered if title insurance is really necessary. I mean, sure, it protects you in the event of a dispute over the ownership of your property, but how often does that really happen?

This issue has been brought into sharper focus by recent developments in the ongoing foreclosure crisis. In fact, a number of major lenders have frozen their foreclosure proceedings due to concerns over the validity of their claims.

So… What would happen if a bank foreclosed on a home and ultimately sold it to someone else, only to later have a judge overturn their decision? What if you were the new owner, and the original owner came back to claim their home?

These are the questions that Ron Lieber tackled in his recent NY Times column. The short answer is that you’d be in trouble if you didn’t have title insurance. And such troubles aren’t limited to botched foreclosures.

What if the long-lost heirs of the original owner showed up on your doorstep stating that they never agreed to the sale of the property? Or maybe a contractor field a lien against the original owner, and now wants to make a claim against your house. While title insurance will protect your interest, there are a couple of potential gotchas.

  • For starters, you need to be sure that your title insurance policy covers both the lender and you. If you take out a mortgage, you’ll be required to carry a policy to protect the lender, but not necessarily yourself.
  • Second, title insurance policies typically only cover the purchase price of the home. Thus, if you buy a home on the cheap and spend a bunch of money fixing it up, you could wind up taking a hefty loss.

Ultimately, title insurance is a necessary evil. And guess what? If you refinance, you’ll need to buy a new policy. The good news is that you should be able to get your new policy for a reduced “re-issue” rate. If the title company doesn’t offer it to you at a reduced rate, ask them to do so.

Foreclosure moratorium?

While I was writing this, a story popped up on the local news talking about the possibility of a national moratorium on foreclosures. This talk is coming on the heels of reports of bank officials signing stacks of foreclosure documents without even reading them.

What do you think? Should lawmakers step in and halt foreclosures until we get things sorted out? Or should they just butt out and let the process run its course?

11 Responses to “Why You Need Title Insurance”

  1. Anonymous

    I can’t help but feel that Title Insurance is a scam of sorts…I don’t know anyone who has ever needed it, I have owned and sold at least a dozen homes in my lifetime and I have never used it or even known what it was really for! I’m buying a house in MA and my lender requires that I buy this for their proctection but it is optional for me…I’m feeling like it is a waste of $1000 but of course I’m hesitant to swim against the popular current

  2. Anonymous

    @Kev – Yep your assertion that I oversimplify is accurate. And you’re correct about data bases, and the request side data that feeds them. I also submit that a contract, warranty, or any other agreement is only worth how much money people will put behind it.

    Settling outside of court is popular b/c it is cheap and makes all the drama go away. Right and wrong is a great discussion for L1 or other academia venues, but we all have a limit to the amount of money we will spend to participate in and win a lawsuit. No matter if you are the buyer, seller, taxing agency or vendor with a lien.

  3. Anonymous

    I read in another forum about a house purchase that missed some major details. The owner bought a house, then a few years later the area was re-surveyed for some utility installations or something similar. It was found at that time that the property line was between the house and the driveway.

    The neighbor on that side had his own driveway right next to the property in question, then according to the survey, the neighbor now owned both driveways. Upon being informed of this, the neighbor parked his boat in his new driveway and blocked the other homeowner from using the driveway.

    Apparently the street was not wide enough to support parking on the street. This situation seems like something that title insurance would work in, but it does not. I think they ended up walking away from the house because the value was so deflated by the lack of driveway along with the housing bubble that it made no sense to continue paying the mortgage.

  4. Anonymous

    @bodark,

    The company I work for provides software solutions to county government – namely the Clerks / Recorders office. I’m completely immersed in the software used to record and search real estate documents and have been for over ten years now.

    With that being said, I think you are over-simplifying the steps involved in performing a thorough title search. The way the documents are filed and cross-referenced with other documents varies from state to state and even within different counties in the same state depending on what a particular office holder’s interpretation of the law was at the time the documents were filed. Some of the records may be computerized, some may not be, there may have been mistakes on the original document (i.e. name misspellings) which is no fault of the county, the different searching tools can be complex at times, and so on and so on. I could go on all day with this.

    You are correct in that the Office Holder’s job is to serve the public by providing assistance, it is not their job however to make sure you perform a completely accurate title search.

    I won’t debate whether or not title insurance is scam or not, but I will say that is in the best interest of all involved to leave title searching to those who know exactly what they are doing.

  5. Anonymous

    Hmmm – Sorry Nickel, I am on the opposite side of this argument. My opinion only – Title Insurance is a scam. Head on down to the county clerk, search the public records and deeds for the property. Don’t know how to do that? Ask the clerk, that is why they have a job. Sort records and assist the public.

    A title plant (private database and records the title company owns) is built on the data housed at county. And the attorneys that a title company will provide if you get into a lawsuit are corporate attorneys employed by the title company. Thus, their job is to protect their firm, and get a settlement or judgement that cost the title firm the least – preferably zero dollars.

    However, just like some folks feel escrow is a good idea, title policies are probably a good idea for some. I just personally hate paying taxes for a service (County records), and then paying a service fee (title policy) for something that I can do my self.

  6. Anonymous

    +1 to HankC.
    And may I add that a moratorium on foreclosures will only delay the inevitable (much like the Keeping Homes Affordable loan modification program). People who couldn’t afford them then certainly won’t be able to afford them now.
    What people need is jobs so they can pay their mortgage, not a foreclosure moratorium. The rich and the poor may want handouts, but middle america wants paychecks.

  7. Anonymous

    The current foreclosure difficulties are a judicial problem rather than a “lawmakers” (legislative) problem.

    Inefficient and corrupt civil courts/judges casually accepted incomplete/falsified documents & representations from alleged mortgage-holders… and then issued formal court-order foreclosures against home-owners.

    Court Judges & Chief Court Clerks failed in their most basic responsibilities to perform due diligence. Well established legal procedures for property titles & mortgage contracts have functioned well in America for centuries — it ain’t rocket-science, but it at least requires an honest court system.

    And any person, bank, or company that filed falsified mortgage documents with a court — should be quickly indicted and prosecuted for criminal fraud.

    The courts are now run by well-connected insiders for their own benefit. No society can prosper under that burden.

  8. Anonymous

    Banks need to prove they’re doing this right – a moratorium until each bank can document it’s process and show they’ve looked for bad foreclosures and rectified them is the most efficient and fair way to do it.

    If we let people fight this out one by one – not just everyone who’s in foreclosure, but everyone who’s bought a foreclosed property – it will take decades, and be inconsistent – judges in different places will make different rulings, and people who don’t have the stamina, funds, or know-how to fight individually in court will not get anything back on bad foreclosures. Plus, those are the people who were targeted by predatory lenders in the first place.

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