At some point in time during the process of buying a home the issue of title insurance will arise. If you are making an offer to purchase in the Louisville, KY area you may be using the standard Greater Louisville Association of Realtors contract. This contract contains a specific paragraph that advises buyers to purchase an owner’s title insurance policy and actually requires you to initial a space acknowledging you are declining this option.
What is title insurance? First, you need to realize that the word ‘title‘ refers to the chain of ownership of a piece of property. At some point in the past, that particular piece of property was surveyed and conveyed to an entity, whether it is an individual, a corporation, or other legal vehicle, and a record was established in a local government office. In Kentucky, the records are maintained by the county in which the property is mostly located.
In addition to the chain of ownership that is maintained by the county, there will also be records pertaining to all legal claims against the property that have occurred throughout the years. These could be in the form of easements, liens for work performed, mortgage notes, special assessments, etc. Any one of these, and many, many others that are not listed, could affect the ownership of the property and this is where title insurance comes into play.
For someone to sell you a piece of property they must legally own that property and have full authority to convey ownership to another entity. As a quick example, if a married couple owns a piece of property jointly, the husband or the wife individually could not sell that property without the consent (in writing on the deed of transfer) of the other party.
One of the most important steps in the transfer of property is the title search. Typically, the lender will commission a professional to search the chain of title for the property to be transfered to ensure the seller has the legal authority to transfer the property and there are no outstanding recorded claims against the title. While this search is considered very thorough and should be enough to protect the parties involved, the lenders know that problems can and do arise and they will always buy a lender’s title insurance policy to protect their interests from an unrecorded or missed claim. In other words, if someone makes a legal claim to the property and threatens the lender’s investment, they will be covered and defended fully by this policy.
Here is a great post on this topic by Dan Melson that enumerates several of the ways problems can complicate the transfer of property.
What does this mean for you as a buyer? Simply put, if you do not have an owner’s title insurance policy in force and a legal claim is made against property you have purchased, you will have to defend the claim out of your own pocket. Even worse, if you lose the legal battle, you will lose the property and most likely still owe the lender for the money you borrowed. You will be in big financial trouble.
Owner’s title insurance policies are very inexpensive in this light. In fact, they are typically only a few hundred dollars and I think they are well worth every dollar in piece of mind, protection, and investment smarts. So the next time you are asked if you would like to accept an owner’s title insurance policy when buying real estate, you may want to give it serious consideration.