Why is title insurance required

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Insurances Auto Insurance. Loans Top Picks. Thinking about taking out a loan? Knowledge Knowledge Section. Recent Articles. What is title insurance? Why do I need title insurance? How does title insurance work? What happens if I don't have title insurance? The Ascent's best mortgage lenders If you want to uncover more about the best mortgage lenders for low rates and fees, our experts have created a shortlist of the top mortgage companies.

The best mortgage lenders. FAQs What is title insurance? About the Author. Blue Twitter Icon Share this website with Twitter. Email Icon Share this website with email. Back to The Motley Fool. Subject to certain exclusions, the insurance will cover the cost of remediation. Title insurance typically protects against losses arising from issues such as:.

Like all insurance policies, there are exclusions to coverage. It is very important to read the insurance policy thoroughly and make yourself aware of the exclusions. For a risk to be covered, it generally has to have existed prior to the policy date and not be something that you created after you became an owner. Title insurance is not mandatory in Ontario; however, many mortgage lenders require it, particularly if no building location survey is available.

The cost of title insurance varies based on the use and value of the property. For the owner, this is a one-time fee due on closing, and protects you and your title for as long as you own the property. Title insurance is intended to protect you against title risks. The appropriate remedy is also at the discretion of the title insurer and may therefore not be satisfactory to you, e. Some buyers still prefer us to undertake municipal off-title searches. It may still be preferable to conduct some of the municipal off-title searches, depending upon your individual circumstances and intentions for the property.

Or the seller might have inherited the house under the terms of a will that—oops—turns out to have been out-of-date, and a more recent will leaves the house to someone else.

Not all title problems involve the whole house. For example, people or agencies might have filed liens against the property —legal claims to be paid from the proceeds of the property's sale, in order to settle the homeowner's debt to them.

The most common types of property liens seek payment for debts related to taxes, child support , and contractor's fees often referred to as " mechanics liens ". These liens stick to the house like glue, until the house is sold or foreclosed on. Disputes over property boundaries also often result in title insurance claims.

In any of these situations, title insurance will step in to help. One important note on co-op housing : If you're buying a co-op, where you won't actually own real estate just shares in a corporation , no title insurance is needed. Title insurance is typically a combination of two policies: a lender's policy and a borrower's policy. Your lender—assuming you're taking out a mortgage loan —will require that you buy a lender's policy also called a "mortgagee's policy" to pay for its legal defense costs and reimburse any mortgage payments you can't make because you've lost the house to someone else's claim on it.

The lender might also require you to buy an "owner's policy" to cover your own legal fees and other losses, as yet another step toward protecting the lender's collateral. Even if your lender doesn't require you to buy an owner's policy, you should probably consider buying one anyway. Why do you need both policies? No preliminary title search see below to learn about title searches , no matter how complete, can predict when a long-lost relative or heir will turn up or whether paperwork buried for years under a misspelled name will reveal a claim concerning the property.

The lender's policy will kick in to defend such claims and, if all goes well, might resolve the matter against whoever brought it up. But what if the court decides that, for example, the long-lost relative is in fact the house's true owner?

Then the lender's policy will reimburse the lender for what you owe on the mortgage—but you'll be out the amount of your down payment and other principal payments, not to mention that you'll no longer own the house. The owner's policy, however, will cover your financial losses though you might still have to move out of the house. No one wants the past to come back and bite the homebuyer this way, which is why the title insurance company will perform a "title search" as its first task before issuing the policy.

Or your attorney might handle this, depending on the custom in your state. The search involves combing through public records concerning the house—including past deeds , wills , trusts, divorce decrees, bankruptcy filings, court judgments, and tax records. The resulting preliminary title report sometimes called a "title insurance commitment," "commitment of title," or an "encumbrance report" gives everyone a chance to eliminate trouble spots before proceeding with the sale—or to call the sale off, if anything too serious is uncovered.

It also lets everyone know the conditions under which you'll be offered insurance. For example, the policy won't cover some things that can't be known or cleared up exclusions.