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Title insurance provides financial protection against loss arising from problems connected to the title of your new property. Before you purchased your home it may have gone through several ownership changes. There may be a weak link at any point during that chain of ownership that could cause trouble for you. For example, there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.
There are two kinds of title policies. A 'Mortgagee's/Lender's Policy' that covers the lender, and an 'Owners Policy' that covers the purchaser.
So, do you have to have title insurance? Title insurance is only mandatory if you are taking out a mortgage, because all mortgage lenders require your title insurance to be in an equal amount to your loan. The full premium for the title insurance is paid at closing and the title insurance policy stays in effect until the loan is repaid.
As with mortgage insurance, it protects the lender, but the purchaser pays the premium. The required mortgagee policy protects the lender up to the amount of the mortgage, but it doesn't protect your equity in the property. For that, you need an owner's title policy for the full value of the home. In many areas, home sellers pay for the owner's title policy as part of their obligation to deliver 'good title' to the home buyer. In other areas, borrowers must buy it as an add-on to the lender's policy.
The standard title insurance policy does not cover the owner for matters that arise after closing, which is a weakness. Many events beyond your control can reduce the value of your house after you buy it. If it is a newly constructed house, subcontractors claiming they had not been paid by the builder may place a lien on the house. Also, a neighbor could build on your land without your knowledge, thereby adversely possessing and eventually taking your land. Or, you may be told that you must correct a zoning violation of the previous owner.
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