When does it pay to have a title insurance policy?

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Even if its seems that everything has fallen perfectly into place with a new home purchase, there is always the possibility that something from the previous owner’s past will come back to haunt you. This is where title insurance comes in handy.

Generally speaking, title insurance provides protection from troubles with the legal ownership status of a home or property. But, many buyers do not realize that there are two types of title insurance: one protecting the lender and the other protecting the buyer.

If you purchase title insurance, the bank and/or title company you are working with will preform a search for legal claims and rights attached to the house before the transaction is completed. No matter how thorough the search, however, there is always the possibility that a long-lost relative or heir will come along with paperwork that appears to give them ownership rights to the property. In these cases, having both types of title insurance, a lender’s policy and an owner’s policy, will ensure that you have the protection you need.

Below are five common situations in which title insurance can make all the difference.

Second Sellers
Sometimes a friend or relative of the previous owner will claim that they have ownership rights to the property, in whole or in part. If a judge confirms the outside party’s claim, you could be forced to negotiate with them or buy them out.

Should a judge rule in favor of the party staking claim to the house, the lender’s policy will cover the bank’s court costs and reimburse the bank for what you owe on the mortgage if the sale is made null and void.

Encroaching Neighbors
It is not unheard of for a neighbor to put a fence, deck, pool, shed, driveway, or other add-on on someone else’s property. Whether they believe it is solely on their property or are ware of their wrongdoing, title insurance can help resolve the issue should the incident occur before you close the sale. Title insurance will pay the cost of any legal battle or attempts to settle the issue outside court and have the item removed from property that legally belongs to you.

Hidden Mortgages
It is possible that the initial search will not uncover a mortgage until after its closing, because of how it was posted with the county recorder. Title insurance can save the day.

“Because the buyer received a clear title at closing, if an owner title insurance policy is in place, the buyer just has to file a claim and the policy will pay off that lingering mortgage,” said Marc Israel, president and chief counsel of MIT National Land Services.

Unpaid Taxes
There is the possibility that a buyer could receive delinquent back taxes after closing. Unless the buyer has title insurance, that bill can be hard to manage.

Dave Zawadzki, senior account executive at Proper Title, LLC, said, “An owner’s title insurance policy would pay for this, because the buyer was given paperwork that indicated taxes were paid.”

The Point of Purchase
Israel states that title insurance policies are issued and paid for the day of closing, and reminds that the one-time cost varies by location.

“Every state regulates the price of title insurance, which is tied to the purchase price and/or mortgage amount,” Israel says.

If you are on the fence about purchasing title insurance, sit down with a company for a consultation. Then, evaluate your personal finances and determine how you would handle, and pay for, a title-related nightmare.

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