Ask the Egghead: Is title insurance really necessary?

Question: Title insurance seems like an unnecessary waste of money. Is it really that important?

Answer: Every year, about one in five home buyers decline to purchase title insurance, leaving them vulnerable to serious financial risks.

Here’s an example of a problem that could have been avoided with title insurance. A family buys a home from a seller who had an undisclosed $400,000 loan on the property. The buyer’s lender paid the seller directly at closing and did not pay off that unknown  loan. As a result, the family was at risk of foreclosure because the unknown lender had claim against their title.

During closing, a title company helps transition the home to the buyer by looking at public records. If a discrepancy is uncovered, a rep from the title firm fixes the problem before the purchase. Even after the sale is complete and everything seems dandy, the buyer can be in for several nasty surprises:

  • Tax liens discovered after closing.
  • Forgery in the chain of title.
  • Mistakes in recording.
  • Unknown easements.
  • Claims from ex-spouses or heirs.

Title insurance protects against hazards like these and more. The title insurance company pays for legal costs defending an attack on a title, for a one-time fee at closing. In Virginia, it’s up to the buyer to select and pay a title company, and your agent can help you identify and select a suitable company. A policy costs around $1,000 — a small price to pay or the peace of mind you’re getting.

Illustration courtesy of Carlisle Title

More details are available through the American Land Title Association consumer education site.

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