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Thursday, 4 February 2010

What is Title Insurance?

Everybody sees a charge for Title Insurance on each refinance or purchase transaction they’re involved in.  However, many people can’t define what it is OR why they need it.  So, let’s unpack this a little and get some clarity on the subject.

Title Insurance is simply a product used to protect the financial interests of an owner or lender in real property against loss due to defects, liens, or unlawful transfers.  It will reimburse the insured for any monetary loss incurred up to the amount of policy.  All major lenders require title insurance to insure that their liens are recorded ahead of all junior liens.  The property records are such that each lender would rather require insurance versus do a real property records search on every transaction and make certain that they are properly protected in the case of a default or transfer.

The difference between an owner’s policy and a lender’s policy is simple.  In an owner’s policy, the seller of the property is transferring title (ownership interest) to the buyer.  The policy insures the new owner that the title is free from encumbrances.  If the title company issues a policy and misses something they are responsible for covering the financial loss as well as the litigation costs to settle the matter.  The amount of the policy is equal to the sales price of the property.  On a lender’s policy, the lender is protected in the event the title search/abstract is incorrect and their lien is recorded incorrectly or in a junior position.  If there is any loss incurred by a mistake on behalf of the title company the settlement is between the lender and the title company – not the owner of the property.

When compared to other types of insurance title insurance is very affordable.  You only pay when you record a new transaction and it’s usually less than 1% of the transaction.  The title insurance company bears all the responsibility for the policy including any and all costs of litigation.  To make sure that they have enough reserves the government monitors the financial position of these firms closely and requires them to post a large bond in order to obtain a license to sell the insurance.

In conclusion, it might help you sleep better at night knowing that when you buy a house or refinance with a FHA Streamline your financial interests and your lenders are protected.  American Heritage Lending is responsible for thousands of clients and their families with respect to the financing we arrange and we feel very confident that our clients are well served with high quality title insurance policies.