What is Title Insurance and Why Do You Need It?

You may have heard about an owner’s title insurance policy, but what exactly is title insurance, and why do you need it?

Title insurance protects not only buyers but also mortgage holders against certain issues or defects that may arise with the title to a property upon the transfer of ownership.

Before closing on the purchase/sale of a property, the title company conducts a thorough review of the title to the property. Should a dispute arise in the future, the title insurance company that issued the title insurance may be held responsible for paying civil damages to the property owner.

Title Insurance Policy Process

Issuing a title insurance policy is a two-part process.

The title company researches matters of record to ensure there are no unpaid taxes, undisclosed heirs to the property, pending legal actions, fraud, errors or other problems with the deed. This process confirms that the title is clean; the seller owns the property and possesses the legal right to sell it.
The title company then works with an underwriting company that issues the title insurance policy and who will defend you if any defect in the title is challenged. Ultimately you will likely be compensated if you experience any losses that result from a defect in your title to the property. Owners typically need two separate title insurance policies: one for themselves and another to protect the lender.

The Differences Between Various Title Policies

There are three different title policies in Washington: standard, extended, and ALTA Homeowner’s. Below is a list of what these policies protect against:

Protection Against:	ALTA Homeowner’s	Standard	Extended
Determine defects, liens, encumbrances, adverse claims or other potential legal matters not disclosed or known to the new owner before closing
Fraud or forgery related to the execution of documents
Mental incompetence or undue influence of the Grantor
Missing or undisclosed heirs
Will was not correctly probated, mistaken interpretation of trusts and wills
Conveyances by a corporation or partnership or transfer by a minor without proper legal authority
Non-delivery of deeds or incorrect legal descriptions
Delivery of deed after the death of the Grantor
Errors in recorded legal documents
Unmarketable title as insured or lack of legal access to the property
Unrecorded liens
Survey and boundary disputes or questions
Claims of parties in possession but not disclosed by public records
Easements or claims to easements that are not disclosed by public records
An existing violation of regulations or subdivision laws affecting the land making it: Impossible to obtain a building permit The violation must be removed; or Another party has the legal right to the property and refuses to perform a contract to purchase the property, lease it or take out a mortgage on it. This covered risk is subject to: A customer deductible of either 1% of the policy amount or $2,500, whichever is less Title company’s maximum liability is limited to $10,000
Specific zoning issues that may force or require modifications to the existing structure. This covered risk is subject to: A customer deductible of either 1% of the policy amount or $2,500, whichever is less Title company’s maximum liability is limited to $25,000
The property must remove an existing structure(s) because it encroaches onto a neighboring parcel. This covered risk is subject to: A customer deductible of either 1% of the policy amount or $2,500, whichever is less Title company’s maximum liability is limited to $25,000

Post Closing Title Coverage:

Protection Against:	ALTA Homeowner’s	Standard	Extended
Another party owns an interest in the title
Another party has legal rights that affect the title due to leases, contracts or options
Another party has an easement on the property
The property has a defective title
Another party has the legal right to limit the use of the property
A neighbor builds a structure (other than boundary walls or fences), after the policy date and encroaches onto the land

Private Capital Northwest is a premier Washington hard money lender. As a private lender in Seattle, we specialize in offering hard money bridge loans, construction loans and fix and flip loans. Contact our team today to schedule an appointment or learn more about the hard money loans process.