In addition to a formal title search, your lender is likely to require a title insurance policy. The policy guards the lender against an error by whomever searched the title. (In some cases, the title insurer might arrange for or conduct the title search.) Let's say, for example, that a long-lost relative of the seller turns up with indisputable evidence that the relative - and not the seller - holds legal title to the property. Though it should have been found in the public records, the relative's claim was missed somehow. Errors are rare, but they do occur.
When this happens, the lending institution finds that it has loaned the homebuyer thousands of dollars to buy a house from someone who did not own it. To avoid such problems, the lender will insist on title insurance prior to settlement. The cost of the policy ( a one-time premium ) is usually based on the loan amount, and is often paid by the purchaser. There's nothing, however, to keep you from asking the seller, during your negotiations, to pay part or all of the premium.
The title insurance required by the lender protects only the lender. To protect yourself against unforeseen title problems, you may also want to take out an owner's title insurance policy. Normally the additional premium cost is only a fraction of the lender's policy, but this can vary from area to area.
Some final advice on keeping title insurance costs low: if the house you are buying was owned by the seller for only a few years, check with a title company. If you can obtain a re- issue rate, the premium is likely to be significantly lower than the regular charge for a new policy. If no claims have been made against the title since the previous title search was done, the seller's insurer may consider the property to be a lower insurance risk.
Finally, shop around. Not just for the premium (which can vary depending on how much competition there is in a market area), but for coverage as well . Generally, you should look for a policy with as few exclusions from coverage as possible. The exclusions are listed in each policy. Some policies have so many exclusions - that is, situations under which the insurer will not pay for your title problems - that you end up with little coverage for your premium dollar.
