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What is title insurance and what does it do?

On Behalf of | Aug 11, 2022 | Real Estate

Many first-time homebuyers experience sticker shock when they receive their settlement statements. The amount of money required to buy a home is typically thousands of dollars more than the price they offered the seller.

Buyers often need to deposit thousands of dollars into escrow accounts to have sufficient reserves for their next property tax bill. They will need to pay for homeowner’s insurance coverage. There will also be extensive closing costs, including a signing fee for the location where you fill out the paperwork and title insurance costs that may be thousands of dollars.

In fact, you will probably notice that there are two different title insurance premiums if you finance the purchase of the property. Why do you have to pay for title insurance when you buy real estate?

Title insurance protects your ownership interest

When you buy a home, what you technically buy is the legal right of ownership. You protect that right by recording the deed that transfers the property to you at the appropriate county office. The recorder maintains records of who owns which property and what, if any, liens exist against a specific property.

Your title insurance policy protects you against title claims that could endanger your ownership. For example, if the property recently transferred as part of an estate, a beneficiary of the estate might come forward and claim that they should be the owner. Some people even encounter claims brought by an individual who was defrauded. Those claims may lead to court proceedings and could result in the loss of your home.

What title insurance will do for you

Title insurance will pay for the cost to have a real estate attorney represent you when there is a claim against a property that you own. If the claim is successful and the courts rule against you, title insurance will reimburse you for the money you have invested in that property, from your down payment to the equity accrued by making monthly mortgage payments.

You have two such policies on your settlement statement because the lender who finances the transaction also requires protection in the event of a title claim. Although the chances that you will need such coverage are very rare, it can make all the difference if there is ever a viable claim against your real property.

Learning more about the details of residential real estate closings can help you prepare for an upcoming real estate transaction.