Understanding Title Insurance & Why You Need It
UPDATED: September 19, 2013
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Title insurance is an insurance policy that guarantees that I am getting clean title to my property. In other words, it is insurance that that I am receiving a 100 percent interest in the specific piece of real estate. If it later turns out that there are other claims, the title company must reimburse me for any resulting financial loss according to the terms of my title insurance policy.
Understanding Title Insurance
When I buy property, I assume the person selling it to me has the right to do so, and that I am getting the real estate free and clear of any encumbrances. Unfortunately, this isn't always the case. For example, if the previous property owners owed back taxes on the property, a tax lien might have been placed on the house. Likewise, if the previous owners had some work done on the home and didn't pay, there might also be a mechanics lien. In both instances, that would mean that the IRS and/or the mechanic have a claim to the property, and that I am responsible to pay them. Because this could be a large financial loss, I would want title insurance to take on this risk of loss. If the title company said I had clean title and provided title insurance to me, and then it later turned out there was a mechanics lien, the title company would be required to pay off the balance so I would get the free and clear property ownership I was promised.