To ensure the validity of the mortgage as a lien on your property.
What you may not understand is this. That coverage does nothing for you. It only protects the bank.
Lending institutions want to protect their investments, so they require the borrower to buy that protection.
What Is Homeowner's Title Insurance and Should You Buy It?
Generally, according to Bankrate, one out of every three real estate searches finds a title defect that's fixed prior to closing. In other words, the title company commonly finds problems before the new owner takes possession of the property.
A homeowner title policy goes beyond what a title search can find by protecting you from what isn't there. For example:
- Undisclosed heirs
- Spousal claims
Here's a real life example. A young man buys a home that was owned for 20 years by a couple. The buyer chose not to buy title insurance. The transaction closed and he moved into his house.
A few weeks after he moved in, there was a knock at the door. A woman stood there and asked him one question, "What are you doing in my house?"
It turns out that the couple at closing was only half of the party that originally purchased the house. The man at closing was her former husband. Instead of bringing his ex-wife to closing, he had his girlfriend pose as his wife.
They took the money, wired it to an off-shore bank and vanished. Now the young man legally owns only half of the property. He will have to spend money on attorneys to sort this mess out.
If he had bought homeowner title insurance, the attorneys for the title insurance company would have to sort it out.
"But Isn't That An Unlikely Scenario?"
Buying homeowner title insurance is similar to buying health insurance, except you only pay for it once.
Health insurance offers protection against the unknown. It might seem unlikely that you'll be in an auto accident or contract an illness, but it happens.
Isn't better to be prepared?
Even properties that are new can have potential problems. If the house you're buying has just been constructed, consider this.
A contractor has to get a construction loan to build a house. What if there are problems with the company that directly affects your ownership of the home?
There are many reasons to consider homeowner title insurance, but the biggest one is peace of mind.
When you're investing in the biggest material possession of your life, the last thing you want is the threat of losing a home you worked so hard to get.