Here’s a homeowner’s nightmare: You decide to buy a house from a husband and wife who are splitting up. The husband goes through the closing of the sale, saying that his wife has given him the right to sign all the papers. But after the closing, the wife shows up… and claims she never sold her half of the house! You end up in a fight with her over who owns the house.
Or, another nightmare: You buy a house from a seller who seems very nice, but you have an incompetent real estate attorney, and your transaction is never made part of the public record. After a few weeks, your old seller sells the house… again! Since your purchase has been properly documented, you end up going to court with the new buyers over who owns the house.
Title Insurance Defends Against A Flawed Real Estate Transaction
These are the kinds of risk that are covered by title insurance, which I advise all homebuyers to purchase, just as they do homeowner’s insurance. Homeowner’s insurance covers damage to your house from a windstorm or a robbery; title insurance covers damage to your house from forged documents or bad public record-keeping. Title insurance comes in two halves: “lender’s title” and “owner’s title.” This corresponds to the two ports of money most people use to buy a house—the mortgage and the down payment.
Banks Insist On Title Insurance, And You Should Too
If you take out a mortgage to buy your house—and most people do!—the bank forces you to buy “lender’s title insurance” to protect its investment. Let’s say you’re buying a $250,000 house. You put down $25,000 and borrow $225,000. The bank will make you buy lender’s title insurance for its $225,000 loan. Savvy financial management dictates that you protect your down payment as well by buying “owner’s title insurance” to protect your piece of your home. Although this isn't required, it’s also not very expensive; at current rates, owner’s title in an example like this would cost you a little less than a hundred dollars. With luck, you’ll never need it, but we want you to protect one of the biggest investments you’re ever going to make.