What is Title Insurance Anyway?

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By Candice Choi, AP Personal Finance Writer

NEW YORK (AP) — Amid the heap of obligations and expenses that come with buying a house, title insurance can be one of the most bewildering.

The topic can make your eyes glaze over, but anyone buying a home for the first time needs to understand exactly what it is. A home is likely to be the biggest investment you'll ever make, and title insurance plays an important role in safeguarding it.

In this installment of "Your Money," we answer questions about why title insurance exists, what types you'll encounter, and what you can expect to pay for it.

Q: What's the purpose of title insurance?

A: The title to a home can carry any number of ugly surprises. There could be liens against the house for unpaid property, state or federal taxes, or even homeowner association dues. Remodeling work on the home might not have been paid off. Or the ownership of the home — and the right of the seller to put it on the market in the first place — could be disputed.

Whatever the case, once you close on a home, any problems with the title belong to you.

"All liens convey with the property, so you want to make sure you have a clear title," said Mark Savitt, a mortgage broker in Martinsburg, W.Va. and past president of the National Mortgage Brokers Association.

Your attorney or the title insurance company should perform a search on the title, which will likely include going to the county court house to pull property records. However such searches aren't always exhaustive. Title insurance is intended to protect against any liens that might come to light later on.

Q: What types of title insurance are there, and are they required?

A: There are essentially two types of title insurance: lender's title insurance and owner's title insurance. The bank issuing your mortgage will require you to buy lender's title insurance. However, this only covers the amount of your mortgage, and coverage only lasts for the duration of the loan.

An owner's policy, which is optional, is intended to bridge any gaps in coverage, said Martin Schwartzman, assistant deputy superintendent for the New York State Insurance Department.

In general, title insurance protects you from pre-existing liens on a home. But some owner's policies will also protect you from liens that might appear after the purchase, perhaps as a result of fraud, according to the American Land Title Association, an industry group based in Washington, D.C.

While it sounds like a good bet, owner's title insurance isn't the norm everywhere. In upstate New York, many people don't buy owner's coverage and instead rely on their lawyers' guarantees that a title is clear, said Ellen Buxbaum, an attorney for the New York State Insurance Department.

If it turned out there was a lien on the home, and the lender's policy doesn't cover it, the owner might go after the attorney for the cost, Buxbaum said.

Regardless of where you live, it's worth considering owner's title insurance.

"Most people will say that (a house) is such a significant investment, that the price is relatively small," Schwartzman said.

Q: Who pays for title insurance, and how much is it?

A: You pay for the lender's coverage, and the price will be based on the loan amount. For a $150,000 loan in West Virginia, for example, coverage would cost a one-time fee of around $500, said Savitt.

The price of owner's title insurance will also vary depending on where you live. In New York, title insurance companies follow established rates. This is not the case in most states, however, according to Buxbaum.

On average, getting owner's title insurance on a $250,000 home would cost about a one-time fee of about $900, according to the American Land Title Association.

Where you live typically determines who pays. On much of the West Coast, the seller typically foots the bill for owner's coverage, according to the association. On the East Coast, it's usually the buyer.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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