As you shop for a new home, title insurance is a must-have. One of the critical steps in the home buying process is obtaining the title. When you obtain the title, it confirms you’ve received ownership rights for the property from the seller. The hope is that the title comes back clear or good, but what happens if it doesn’t? What if there are financial or legal problems with the sale? Your new home could end up costing you far more than the purchase price.

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The last thing you want is to invest your hard-earned money on a home only to find there are unexpected issues that render the title invalid. That is why title insurance is so important. Let’s discuss what it is and why you need it when buying a home.

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What is title insurance?

Title insurance protects homebuyers and lenders against defects or problems with a title when there is a transfer of property ownership. If a title dispute arises during or after the sale of a home, the title insurance company may be responsible for paying specified legal damages, depending on the policy. Most title insurance policies cover the common claims filed against a title, such as back taxes, conflicting wills, and outstanding liens.

What makes a title “dirty” or “clouded”?

A dirty or clouded title implies there are some uncertainties or issues that need fixing. It could mean there is a lien against the property, an heir that never signed off, levies from creditors, building violations, or more. Essentially it is any document, claim, unreleased lien, or encumbrance that may invalidate or impair a title to real property.

Why home buyers should work with a title company

There are two types of title insurance: lender’s title insurance and owner’s title insurance. Most lenders require the borrower to purchase a lender’s title insurance policy to protect the lender if the seller could not legally transfer the title of ownership rights. A lender’s policy only protects the lender against loss.

An owner’s policy is optional but not purchasing it is a risky endeavor. If unpaid taxes, outstanding liens or fines for code violations surface after the property is purchased, the financial burden falls solely on you, the uninsured buyer.

A title insurance policy protects the homeowner for as long as they own the property. If the buyer cannot cover these unexpected costs, then you could be responsible for a lot more than you bargained for.

The bottom line

It’s easy to write off an insurance policy as unnecessary or a waste of money if you never need to make a claim or use the coverage, but this is very risky. If an unexpected problem arises, the consequences could be financially devastating.

Title insurance is a small expense compared to the cost of your new home. The bottom line is it is a good idea to have that extra layer of personal protection that will guard you against the worst possible outcomes, along with a whole lot of stress.