This is why a title search is conducted before the actual sale is finalized. A title search ensures that the ownership of the property is under the seller’s name, that there are no unpaid taxes or mortgages against the property, and that there are no legal claims against ownership of the property.
While title searches are important, they are not fool-proof. Not all issues concerning the property may be discovered during a title search and this can lead to big problems for the owner in the future. This is where title insurance comes in. Title insurance is a necessary protection against any unforeseen issues on the title of the property.
What is Title Insurance and How Does it Work?
Title Insurance, as the name suggests, protects the buyer and the lender against financial losses resulting from any errors in titles of real property. It also offers protection against any legal claims against the property or foreclosure due to unpaid mortgages and taxes. Although it's not legally required some real estate lawyers require title insurance. This is a practice that is highly recommend by any attorney at law in NY and the rest of the country.
There are different types of policies for title insurance but there are two that you should primarily concern yourself with: the owner’s policy and the lender’s policy.
An owner’s title insurance policy covers the full price of the real estate property. The policy protects owners against any problems that were not previously detected in the title search. These issues may include: deed errors, forgery, and claims of undisclosed heirs. In addition, the owner’s policy also protects the owner against financial losses in the event that the title is unmarketable and any additional losses that are covered by the policy.
Owner’s policies may vary from one provider to another. The insured also has the option to add or omit certain policies according to their needs.
It is worth noting that the policy only covers the purchase price of the property and does not take into account inflation. However, the insured has the option to add an inflation rider to cover the full value of the property even as it increases.
Many lenders require the buyer to purchase a lender’s title insurance policy to cover the amount of the loan while it is being paid off. The purpose of the lender’s policy is to protect the lender against any financial losses that may result from unforeseen problems with the real estate title. The coverage amount decreases as the loan is paid off. Once the loan is paid in full, the policy will cease to exist.
These policies need to be intact on the day of the sale along with a clean title of the property for the transaction to proceed.
When buying title insurance, make sure you understand what the policy covers and what it protects against. Since the primary purpose of this policy is to protect your investment, you should also consider adding additional coverage (e.g. coverage to protect you against inflation) if you think you need it.