Buyers need title insurance to protect them from any possibility that the seller (or prior sellers)— did not have free and clear title to the property, which would consequently affect the transfer of property ownership. The risk of faulty title is low, but the potential loss to the buyer is losing the property without compensation, so every home sale involves a title search and title insurance.

There are many complicated decisions in selling and buying a new home. Sellers consider their offering price with care. Buyers look for potential problems with the property that can be corrected before the sale. But the decision about title insurance is simple: whether you are working with a real estate broker or you are doing a for sale by owner, you need title insurance.

What are some potential risks of not obtaining title insurance?

There are several things that could wrong for buyers and lenders if a sale were to close without title insurance. It’s not impossible for honest people to attempt to sell houses they don’t own. Sometimes family members attempt to sell an inherited property that has not gone through probate, or they misunderstand the results of probate; aseller may have obtained a loan with a co-signer whose written approval is needed for the sale; a divorced person may need the written consent of an ex-spouse. And in rare cases, there can be outright fraud, where renters pose as sellers.

Title problems don’t necessarily involve the whole value of the house. People and agencies may, through public records, have filed liens against the property. Typical lien filings result from unpaid contractor fees, taxes, alimony, or child support. These stay with the house, stuck like glue, until they are paid. Title insurance protects buyers and lenders from these consequences of defective title.

Are there any exceptions to buying title insurance?

There are two situations in which it is not necessary to get title insurance: buying into a coop or a time-share. Because the buyer will not own the property, title insurance is not necessary.

Title Insurance usually combines two policies.

When you are planning to get a mortgage to buy your new home, your title insurance will almost always be a combination of two policies: a lender’s policy and an owner’s (or borrower’s) policy. The lender’s policy will reimburse them for mortgage payments you are unable to make should you lose the house to another party’s claim on it. This policy will also cover the lender’s legal fees.

An owner’s policy covers your losses and fees should someone else make a successful claim against your ownership of a house. It’s typical for the lender to require you to take out an owner’s policy as another layer of protection for their investment in your mortgage. But even in the unlikely event your lender doesn’t require an owner title policy, it’s a good idea to take one out anyway.

Why do home buyers need both policies?

Preliminary title searches, no matter how careful or how complete, cannot predict whether paperwork buried in the wrong file will reveal a claim on your property. No title search can predict when a long-lost relative or a disgruntled heir or unhappy ex-spouse will make a claim to the title for your house. If something like this were to happen, the lender’s policy would pay for court costs and make the remaining payments on your mortgage.

The problem in these scenarios is that the lender’s policy doesn’t protect you, the buyer. If a court were to decide that a long-lost relative were the true owner of your house, you would be protected for the principal you still owe on the mortgage, but you would lose your down payment and the payments on the principal that you had made from the time that you bought the house (not to mention losing the house itself!). An owner’s policy would protect all the payments you made toward the cost of the house (but not interest) and legal fees. Unfortunately in some cases, you still might have to move out of the house.

Why is the preliminary title report so important?

Because title insurance companies do not want to have to pay out claims they will perform a “title search” before they insure your title. (If you are buying a property outside Oregon or Washington, this task may be performed by the buyer’s attorney in some situations.) Title search involves locating and examining public records of wills, divorces, trusts, bankruptcies, liens, and tax records.

The preliminary title report (sometimes called a commitment of title, an encumbrance report, or a title insurance commitment), gives the buyer and seller a chance to clear up any questions about ownership before proceeding with the sale, or give them an opportunity to call off the sale if there are serious problems. It informs both buyer and seller of the conditions under which title insurance will be offered. If there are some important issues that cannot be known, they will be excluded from title insurance.

The person who has the burden of correcting any defects in title is the seller, not the buyer. Since the seller is making the promise of clear title, the seller is responsible for the resolution of any potential problems with the title. If there are liens against the property, the closing agent will be notified, and typically these liens will be paid from the proceeds of the sale.

How do you get title insurance?

If you are working with a licensed real estate agent, the agency will start the process of getting you title insurance soon after the purchase agreement is signed. There are five major title insurance underwriters in the United States from which your broker will choose for you. Keep in mind that there is usually a one-time fee for coverage,

If you are the seller in a sale without an agent, you need a lawyer to assist you. Don’t skimp on this step. Your lawyer will make sure that you are complying with all state laws that validate the sale. The last thing you want is to get to closing by yourself and face down the buyer’s attorney who asks you a question you cannot answer that scuttles the sale.

Who pays for title insurance?

In Oregon and Washington, the traditional arrangement is for the seller to pay for the owner’s (buyer’s) policy, ensuring that the buyer’s title is clear. The buyer pays for the lender policy, ensuring that the mortgage will be paid. It is possible to negotiate other arrangements in special circumstances, but this is seldom necessary since these costs are considered in the closing.

When do you get title insurance?

The only time it is possible to secure title insurance is at closing. It is not possible to buy title insurance if you discover a fault in the title after the property has transferred to the new owner. Even if you are doing a sale by owner, the title search and title insurance are still essential. But the title company covers these services in its fee.

Having title insurance protects both the buyer and seller from potential risks that can lead to an immense amount of stress. Talking to your real estate agent about the details of title insurance (or your attorney if you are going broker-less) is incredibly important. Having all of the information you need before you get to closing will help you feel more comfortable about the entire process.