What is a Title and Why Do I Have to Pay for Title Insurance?

“Title” is a word for the claim a person or organization has to a home. The title of a home gets passed from seller to buyer whenever the home sells. Depending on the circumstances of the purchase, multiple people or organizations can each have a claim to the title of a particular home. When this happens, we say that each party has partial title. As a homeowner, you will hold at least partial title to your home. Your lenders will also hold partial title as long as you have a mortgage on your home.

Since the term “Title” refers to an idea rather than a single paper document, it is sometimes difficult to keep track of who has title to a home. This is especially true because of the complicated nature of most purchases today. If a homebuyer gets loans from two different lenders, then three parties hold partial title to the home. If the home sells three times in this fashion then there are nine parties who have all held partial title at one time or another. Not surprisingly, unless things are kept very straight, a disagreement may arise about who actually has claim to a home. When such a confusion occurs, we say the title to the home is “clouded.” As a homeowner, you do not want a clouded title. In fact, you legally don’t own a home as long as the title is clouded.

In order to make sure that you don’t have a clouded title you have to trace the entire history of the home, making sure there is solid proof that all previous title holders have relinquished their claims. We call this history the “chain-of-title”. If questions arise, documents are missing from the chain, or there are shady transactions, then you need to fix the problems. Sounds a little daunting?

This is where Title Insurance agencies come into the picture. They conduct a thorough search through all the real estate archives, tracing the chain-of-title of a home. They look for any potential problems like unsettled past debts, or documents scrawled in crayon, and then work to solve any problems they find. Still, it is impossible to be utterly certain that there are no hidden problems. Because of this, they take the risk to insure you, which means they agree to protect you from any surprise expenses that could still arise from the something they missed in the documented past.

Once a Title insurance agency has confirmed that there are no known problems regarding the chain-of-title of your home, you will have a “clear title”. Only then do you actually own the home. Lenders require that you have Title insurance since they have partial title to your home, and want to know that their claim is legitimate. This assures them that their investment isn’t going to cause them financial grief in the future.