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What does Title Insurance really do?

If you've bought any real estate recently, you know there are a TON of closing costs and charges. A big one is title insurance. Do you wonder what title insurance is and when it's used? Honestly, you'll probably never need it. It's a bit like earthquake insurance; it's almost never used, but when it is, it's well worth it. Before we get to the insurance bit, you need to know what "title" is. The most basic explanation of title is it's the trail of legal ownership and possession of real property. Title insurance insures you hold a clear title to your house (excepting, of course, the bank that holds your mortgage). It's particularly important on a house because any organization can file a lien against your property. When you don't pay your taxes, or stiff the contractor you didn't like, or decide to stop paying on those student loans, they all have a right to file a lien. And unlike most debt, the lien is attached to the house, not you. So when you sell that house, and the title company doesn't notice that nasty contractor's lien, the next owner of the house is responsible to pay him, NOT you. Weird and antiquated? Most definitely. And a huge liability risk, if the title company doesn't catch every lien on a property.

Most liens are recorded with the county, so they're relatively easy to discover. To further complicated matters, though, all liens DON'T have to be recorded to be valid. So instead of finding a carpenter's ants' nest, you might get a nasty letter in the mail about the paying that contractor that remodeled the bathroom for the previous owner.

Title insurance guarantees when you buy the house there are no other liens (besides the ones you agreed to pay) against the house. If a lien surfaces after you've closed on the house, the title company has to deal with this. I've only seen it happen once, but it was worth several thousand dollars.

So while were all really hoping against any earthquakes, you'll at least be insured for any title disasters. (Be aware, not all states require title insurance for transfers of property.)

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