Title Insurance - What is it and Why is it Used?

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Buying a home for the first time can be a very time-consuming and complicated process. You will be dealing with many contractual and legal matters while coming across some terms and requirements that you might not be familiar with - such as title insurance. So what is title insurance, why do you need it, and who pays for it?

What is Title Insurance?

Basically, title insurance is a contract between a home purchaser and a title insurer (owner’s policy) whereby the insurer agrees to fix a covered title-related problem, compensate the insured for any loss, or pay for the defense of a title problem that may arise with regard to the ownership of the property. There is also a secondary contract of title insurance between the purchaser’s lender and the title insurer to protect the lender’s interest in the property (lender’s policy).
While an owner’s title insurance policy covers the the interests of the owner of the property and typically insures the purchase price of the property, a lender’s policy typically insures the lender’s interests covering the amount of the purchaser’s loan.

Do you need Title Insurance?

When you purchase a home you want to make sure that there are no problems or concerns with the current or past ownership of the property. You also want to make sure that there are no outstanding liens, taxes, mortgages, or other encumbrances against the property. In addition, a prospective purchaser needs to know about other matters that may affect their future ownership in the property, such as any Covenants, Conditions & Restrictions, HOA matters, rights-of-way, easements, mineral and water rights, and any other rights, obligations and restrictions that will come with the ownership of the property.

The Title Insurance Process.

A title company will undertake a title search of the property records in the county where the property is located in order to uncover those issues that can affect the purchaser’s and lender’s interests in the property. The title company will then produce a title commitment to issue a title policy. It is imperative that the prospective purchaser(s) take the time to review this title commitment and consider obtaining legal advice concerning its requirements and title exceptions if there are any questions or concerns. Payment for an owner’s policy is made by way of a one-time premium paid at the closing of the property, and the insured owner is then covered while they own the property. A lender’s policy is also paid as a one-time premium at closing and insures the lender’s interests for the amount of their outstanding loan balance.

Who Selects the Title Company and Pays for the Insurance? 

The Colorado Real Estate Commission Contract to Buy and Sell sets forth allowances in the contract concerning who picks the title company for its search and resulting title policy, what additional coverage can be procured, what title documents are required to be produced, the deadlines for the production of the title search (title commitment) and for the purchaser to make any objections, and who pays for the owner’s title insurance policy. If a buyer is obtaining a loan to purchase the property, the lender will require a lender’s policy covering their loan interest in the property, which is paid by the buyer obtaining the loan.

What Title Insurance Company Should I Use?
  • You can shop for a title insurance company - get quotes from different companies to see their prices for insurance coverage.
  • Get referrals from those that have had a good experience with any particular title insurance company, such as from your real estate broker, lender, attorney, relatives and friends.
  • Remember, no one can require you to purchase title insurance from a particular company.
  • Check out the title insurance company with your local Better Business Bureau.
  • Search the Colorado Division of Insurance website to make sure that the title insurance company that you are considering using is licensed, as well as checking out any public discipline against the company.