Is Title Insurance Worth the Money?

As future homeowners get closer to the finish line to buy a home, an item they will need to decide on is title insurance.

While it offers protections, there are pros and cons to consider when deciding if title insurance is worth the cost and the legal risks that could potentially occur without it.

What is Title Insurance?

Title insurance is a policy that protects homebuyers’ investments and property rights. There are two types of title insurances: a lender’s policy and an owner’s policy.

Lender’s insurance only protects the lender against problems with the title. Every lender will require a title insurance loan policy be issued for a mortgage loan. When this loan is paid off, the coverage under this policy expires.

Owners’ insurance is an option to consider for homeowners who want protection if someone sues and says they have a claim against the home from before the homeowner purchased it.

According to the American Land Title Association, future homeowners pay a one-time fee to receive coverage for as long as they own the home. The owner’s policy also covers potential legal fees and court costs for settling claims covered by the policy.

A good title insurance can protect homebuyers from a variety of issues including: boundary disputes, conflicting wills, easements, forged documents, mortgage fraud, mistakes in public records, problems with the chain of title, and undiscovered liens or encumbrances on the property.

Title insurance will protect homebuyers from past incidents with the property, while homeowners insurance will protect the buyer against future events.

Realtor Talks Importance of Title Insurance

Miguel Avila, a realtor with Keller Williams Realty in the McLean/Great Falls area in Northern Virginia, recommends his clients to get title insurance. He learned from his personal experience and with some of his clients the benefits of having it.

Before Avila started his career in real estate, he purchased a new construction house in Florida. At the time, he was skeptical about getting title insurance when he purchased land to build a home.

“Why am I spending money on this?” Avila said. “It’s new construction. What can go wrong?”

He later found out that his neighbor’s house was built partially on his lot and his lot was partially built on community property. Then he found out there were 16 properties on the same road that were not built completely on their lots. As a result, the county told the builder instead of tearing down the new construction, they will need to redo all of the surveys to fit the amount of land you sold them and if there are houses with the proper setbacks.

“What would’ve happened if they didn’t do that,” Avila questioned.

The answer was the county would have come back and told them to tear down all those houses because they are not conforming to everything.

“That would have been a nightmare,” he said.

This is where title insurance would come in to help the homebuyer. The insurance company would pay him for the house and land. The company will take care of the rest including suing the developers and lenders involved in that process because that is a possibility.

Avila shared another scenario with one of his local clients. The client is a lawyer and he also purchased new construction in McLean, Virginia and the builder went “belly up.” The bank got the property, finished construction (including interior things) and owned it for almost a year before the client bought it. Within two months after the purchase, the lawyer received some unexpecting news.

“Miguel, I’m being sued,” the client told Avila. “I’m being sued by the builder because they weren’t paid,” said the lawyer.

However that’s when title insurance came to the rescue.

Initially, the title attorney contacted the builder to withdraw the lawsuit immediately. When Avila’s client tried to refinance a year later, the lawsuit was still listed with the Fairfax County records. Nonetheless, the realtor called the title attorney to get a document saying that the lawsuit was removed from the records from the county courthouse and personally went to the courthouse to confirm it was removed.

While title insurance has a lot of benefits, one challenge is that it can be expensive. However, Avila does not look at the cost of title insurance as a disadvantage, but as a smart investment in the long run.

Some clients decide “I am going to save money and not pay for it,” Avila said. “But a lot could go wrong.”