Definition
The term title insurance is used to describe a policy that can protect both a lender and property owner's rights to the legal title to real estate. Title insurance protects the insured against defects, liens and encumbrances associated with the property.
Explanation
When buying real estate, the new homeowner is legally purchasing the certificate of title to the home. Through this exchange, the owner of the title to the home has the legal right to possess the dwelling. Prior to Closing, a title search is conducted to identify public records that may affect the transfer of title to the purchaser of the home.
During the title search, inconsistencies in owner names, outstanding mortgages, liens, and judgments can be found, and corrected, to help protect the purchaser. Despite these efforts, problems relating to the transfer of title can occur after Closing due to:
Easements that might allow for construction of roadways
Pending legal actions or judgments
Forged signatures
Relatives claiming legal rights to the property
Title insurance policies can be purchased by both property owners (Owner's Policy) as well as lenders (Lender's Policy). Title insurance protects the purchaser against these title hazards. The company issuing the title insurance will pay for a defense against an attack on the title, and will either perfect the title, or pay claims found to be legally valid.
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