When buying a home, one of the many essential steps in the process is obtaining a title and you might wonder what title insurance is and how it works. As with any insurance, it protects against loss, and this insurance relates to issues with the title of the home you are buying.
What Is Title Insurance On A House?
Title insurance is a policy meant to protect home buyers and mortgage lenders from damages or financial losses caused by a bad title due to title defects. Most title insurance policies cover all the common claims filed against a title, including outstanding liens, back taxes and conflicting wills.
There are two types of insurance policies for the title; one is lenders’ title insurance which protects the lender through the buyer paying for it. Owner’s title insurance offers protection for the buyer. It is an optional expense a buyer can pay for as part of their closing costs.
How Does Title Insurance Work?
The last thing you want is to put down serious money on a property, only to find that some unexpected issue renders the title invalid. A title insurance policy protects you from that. Before a real estate sale closes, the property must have a clear title. Title companies run searches to find claims against the property.
Public records will be searched to confirm the seller’s ownership and uncover any claims on the home. As well as claims or liens on the property, building code violations, or other issues could stop the title from being clean. Title insurance coverage can protect buyers and lenders should there be a defect in the title or disputes over the ownership.
Claims could be filed against the title for liens, back tax assessments, easements, lines of credit, or disputed wills. While insurance normally protects against things that could happen, title insurance deals with things that have happened in the past.
The two types of title insurance
There is lender’s and owner’s title insurance. Both provide important protections for different participants in a real estate transaction, and it’s important to be able to distinguish between the two and what they cover.
Owner’s Title Insurance Policy
Most owner’s title insurance policies are purchased as a guarantee against potential hazards. Although optional, an owner’s policy typically protects the home buyer from the most common risks, including:
- Conflicting ownership claims, such as will complications and similar disputes
- Outstanding lawsuits, liens and other encumbrances against the property that invalidate the seller’s legal claim
- Erroneous or flawed public records, including honest mistakes like incorrect signatures
- Outright fraud and/or forgery
- Undisclosed easements or other agreements that may limit the usage or reduce the value of the property
While you don’t have to have an owner’s title policy, it can be an added precaution that gives you a little more peace of mind as a buyer. Even if you’ve hired a title company to research properties, there’s always the chance that something will slide under the radar.
Since there is still a risk of financial loss, the owner can buy their own title insurance. The risk to a homeowner increases as they gain more equity in the home, where any claim made would result in a larger percentage being the owner’s responsibility. When a title defect is discovered, and the owner does not have coverage, the closing time frame can be substantially delayed.
Lender’s Title Insurance Policy
A lender will always require the borrower to purchase a lender’s title insurance policy before obtaining a home loan, and the policy is usually issued by the title company to mark the conclusion of their title search.
The basic functionality is the same as that of an owner’s policy: to protect the lender against potential losses in the event that the seller is not legally able to transfer title rights. The lender is covered up to the loan amount. Only the lender is protected by such a policy, however. If you end up saddled with back taxes and aren’t personally insured, a lender’s policy won’t protect you, but an owner’s title insurance policy will.
How Much Is a Title Insurance?
Depending on your chosen underwriter and the state in which you live, title insurance premiums can vary. You can expect your title insurance to cost between $500 and $3,500. If the seller is purchasing the owner’s policy, the cost could be factored into the sale of the property.
Usually, the policy for the lender and the owner have to be purchased together. This ensures that there is protection for both parties involved in the purchase.
On closing day, the insurance policy is purchased as a one-time payment. Though you might get recommendations for which underwriter to choose, it is better to compare options for yourself.
Do You Really Need a Title Insurance?
Although lender’s title insurance is almost always required, an owner’s policy is optional. The consequences of not purchasing the owner’s title insurance can be dire. Should unpaid property taxes, outstanding liens or fines for code violations rear their ugly head after the property has been purchased, then the financial burden will fall solely upon the uninsured homeowner and they could lose their home if they cannot pay the tax bill.
Title insurance protects the homeowner for as long as they own the home. But if you’re not able to cover these unexpected costs, then you could be responsible for a lot more than you bargained for.
Buying a home can be a stressful experience. Fortunately, there are ways to protect yourself, including title insurance, which can offer peace of mind. If you’re ready to start looking for a new home, let's connect! There’s a lot of information to sort through and many options for you to consider. If you still have questions about title-related issues or how to get started on your home search, call us today!