8 March 2008 - Because buying a house is not an everyday occurrence, there are many parts of the transaction that are not familiar to consumers. One common item first-time home buyers have questions about is title insurance. Oftentimes they don't know why title insurance is required by their lender and they don't know enough about it in order to look out for their interests.

Since title insurance can be rather confusing to those who do not deal with it on a regular basis, the following questions and answers will help you familiarize yourself with this vital piece of the real estate transaction.

If you have further questions, your Realtor can provide you with more information about title insurance and the closing process.

What is title insurance?
Title insurance is unique because it is the only type of insurance that protects you against problems that have occurred in the past.

For example, there might not be a clear line of title to the property or there might be liens and judgments against the property from previous owners. Title insurance protects you from any claims that may arise against the property because of past title problems.

Keep in mind, however, that title insurance does not shield you from future troubles like auto or homeowner's insurance would. Any liens, judgments, etc. that you incur on the property are not covered under the policy.

What is a title search and how is it different from title insurance?
A title search occurs before an insurer issues title insurance. The title company conducts a search of the public records to make sure the title is clear when you purchase the property.

Most of the time title problems are uncovered in the title search and rectified before the buyer purchases the property. However, problems can still arise even after a comprehensive title search. The title insurance issued after the title search protects you from any unforeseen problems that may arise in the future because of an undiscovered title defect.

Why is title insurance important?
It is vital for real estate buyers to have title insurance because any number of problems can occur after a purchase.

For example, maybe an unknown heir claims a right to the house. If the heir is entitled to a share of the property, the homeowners could face substantial loss. Title insurance will pay for any claims and legal fees associated with problems that were not discovered in the title search.

Some other potential problems include forged deeds, mistakes in the public record, outstanding mortgage judgments and wills that contain incorrect names.

What types of policies are available?
There are two common types of title insurance policies: a lender policy and an owner policy.

The first policy specifically protects the lender. It repays the lender for the mortgage amount if a claim voids the client's title. Although the policy does not protect the homeowner from loss, most mortgage companies require borrowers to purchase this insurance. The lender policy only lasts until the loan is repaid.

On the other hand, an owner policy protects the homeowner. For a one-time fee, it is issued in the amount of the real estate purchase and will cover you for as long as you and your heirs have an interest in the property.

Make sure to check your HUD-1 statement to verify that you are purchasing a lender and an owner policy.

Who pays for the title insurance?
Often the seller will pay for the buyer's owner policy and the buyer will pay for the lender policy. However, these terms can be negotiated between buyer and seller.

Who chooses the title insurance provider?
That depends. The Real Estate Settlement and Procedures Act says that if buyers pay for the owner policy, they can choose the provider. If sellers pay for the title insurance though, RESPA allows them to choose the title insurance provider.

However, RESPA also says sellers cannot require buyers to purchase title insurance from a certain company as a condition of the sale.