You’ve finally made the decision to purchase a new home, and with that decision comes piles of paperwork full of unfamiliar terms. One of those terms is title insurance. To determine if this is something you need, first you need to understand what it is and how it works.
What is Title Insurance?
Understanding title insurance begins by understanding what exactly a title is. A title is proof or evidence that the person who is claiming to own a property is in lawful possession of said property. In the state of Michigan, it is required that a seller shows a marketable title to a purchaser.
Title insurance is an additional item that protects the insured from any sort of financial loss related to a defective title. This damage could be experienced due to a variety of issues, such as liens or encumbrances, or additional defects in the title to a property. A defect can mean that someone else has claimed ownership interest in the property, documents were improperly recorded, or some sort of fraud took place.
How Does Title Insurance Work?
Each title insurance policy has its own unique terms, conditions, and exclusions, but there is only a one-time premium that is paid up front at the time of closing. Lenders and purchasers require title insurance for their own protection in case of various title defects, but the owner’s title insurance policy is optional.
In Michigan, it’s typical that the seller pays the owner’s title insurance premium as part of their closing costs. For the mortgage or lender’s policy, it’s typical that the buyer pays this fee which is included in their estimated closing costs.
In comparison to other insurances you might think of, such as medical or car insurance, title insurance is a bit different. Instead of protecting against future events or damage, it protects from events that have happened in the past.
Why Do I Need Title Insurance?
Part of the home buying process involves a title company checking the history of a property. When you are ready to purchase a home, you hope that the title researcher finds that it has a “clear title,” meaning that the current owner of the home is in sole ownership of the property and that it’s in clear legal standing. If this is the case for your potential future home, you’re probably wondering – why do I even need title insurance?
Just because a title comes back clear doesn’t mean that issues won’t arise in the future. The title company could’ve made an error during the researching process, or there could’ve been a mistake made in ownership history. There are a variety of issues that could be missed.
If there’s a defect found in your title after you’ve closed on a loan, it’ll likely result in legal fees or even the loss of your property. Paying a one-time fee for protection from these errors might be a small investment now, but it could potentially save you from much larger fees down the line.
Just like other insurance policies, title insurance is one of those things you get to be safe rather than sorry. Although a property might have a clear title, many issues could arise in the future that were missed in the title research. Title insurance protects you from these missteps.
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