A must know...How does title insurance work? Most home buyers and real estate investors want to be certain they are acquiring marketable title. The best evidence is a title insurance policy. Depending on local custom, a title attorney, abstracter or title officer will check the local property records to locate all records affecting the property. Most counties have now computerized this title search.
Then a title insurance company will decide if the records show marketable title that can be insured for both the mortgage lender and the property buyer. If the title is defective or questionable, the title insurer will either decline to insure or will insure with an exception.
Title risks. Some risks would be a forged signature on a deed, such as an ex-spouse, a missing heir who reappears, a deed delivered after the grantor's death, a deed signed by a minor or a person of unsound mind, recording mistakes, errors in copying and indexing, or unpaid property tax liens. These are just a few of the many risks that title insurance companies pay for if they cause a title loss to a property. However, title insurers try to avoid these major causes of losses by spending money before insuring them.
The two types of title insurance. Most buyers are not aware there are two types of title insurance. One is the lender's title insurance policy, which virtually all mortgage lenders require before making a real estate loan. The other type is the owner's policy, which insures the owner's equity in the property. When purchased at the same time as the lender's title policy, the extra cost for the owner's policy is minimal. But as the property owner pays down the mortgage and the owner's equity in the property grows, the owner's title policy becomes more important.
To illustrate, suppose you buy a $100,000 home with $20,000 down and $80,000 mortgage. The lender's title policy will be for $80,000 and your owner's policy will insure your $20,000 equity. However, as the loan balance gradually declines, the lender's policy coverage declines, but your owner's policy coverage gradually increases.
Is title insurance necessary? The risk of title loss is uncertain. Despite the fact that title insurers spend most premium dollars on researching title status before insuring it, major losses do occur.
Title insurance is "peace of mind insurance" for a loss that is unanticipated but which can wipe out a property owner's entire equity. Title losses are infrequent, but when they occur it is good to know a deep-pocketed insurer is waiting to pay your unexpected major title loss.
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