What You Should Know About Title Insurance
Home purchases are exciting and significant investments, but they also involve legal and financial considerations. Title insurance is a vital aspect of the home-buying process that is often overlooked. So, what exactly is title insurance, and why is it so critical for homebuyers? Title insurance protects you as a homeowner and your lender from potential losses due to title issues. It includes liens, encumbrances, or ownership disputes. We'll discuss title insurance in this article, including what it covers, why it's necessary, and how to purchase it. If you plan to buy a home for the first time or are a seasoned homeowner, knowing what title insurance covers is essential to ensuring a smooth purchase. Read on to learn more about this crucial aspect of home ownership.
What Is Title Insurance?
Title insurance is a form of indemnity insurance intended to protect lenders and homebuyers against financial losses resulting from title defects. One of the most common types of title insurance is lender's title insurance, which the borrower buys to protect the lender. Another type of title insurance is owner's title insurance, typically purchased by sellers to protect buyers' equity.
How Does Title Insurance Work?
Any real estate transaction requires a clear title. Before issuing a title, title companies must search the title to determine whether there are any claims or liens against it.
Title searches are used to determine and confirm the legal ownership of a property and to determine whether there are any pending claims on it. Several factors can affect the title, including erroneous surveys and unresolved building code violations, making the title appear "dirty."
Title insurance, unlike traditional insurance, protects against claims arising from past events. Besides protecting lenders, title insurance protects homebuyers from loss or damage caused by liens, encumbrances, or title defects. Back taxes, liens (from mortgages, home equity lines, easements, etc.), and conflicting wills are among the common claims filed against the title.
Basic owner's title insurance policies typically cover the following risks:
- Ownership by another party
- Documents with incorrect signatures, including forgeries and fraud
- Flawed records
- Restrictive covenants (terms that reduce the value or enjoyment of real estates, such as unrecorded easements)
- Judgments or encumbrances against the property, such as outstanding liens and lawsuits
What Does Title Insurance Cover?
Owner's title insurance and lender's title insurance are two types of title insurance . These two insurance policies provide valuable protections for different parties involved in a real estate transaction, so knowing the differences between the two and the coverage they provide helps you make the right decision.
Owner's Title Insurance Policy
In most cases, owner's title insurance is purchased to protect against potential hazards. Even though owner's policies are optional, they typically cover the buyer against the following common risks:
- Possibility of conflicting ownership claims , such as those arising from will complications and other similar situations
- Any outstanding lawsuits, liens, or other encumbrances placed on the property that invalidate the seller's legal claim
- Erroneous or flawed public records, such as incorrect signatures
- Outright fraud and/or forgery
- Undisclosed easements or other agreements that may restrict property use or reduce its value
Although you do not have to have an owner's title policy when you buy a property, it might give you some peace of mind to have it as an added precaution. It is always possible that something will slip under the radar, even if you have hired a title company to research properties for you.
Lender's Title Insurance Policy
When a borrower applies for a home loan, the lender will always require them to purchase a lender's title insurance policy. Usually, the title company will issue the title policy to mark the completion of their title search before the loan can be approved.
A lender's policy works similarly to an owner's policy in that its primary function is to protect the lender against potential losses if the seller cannot transfer title rights. Lenders have coverage up to the amount of the loan. Such a policy, however, only protects the lender.
Suppose you have to pay back taxes and do not have a personal insurance policy. In that case, the lender's policy will not be able to cover you, but an owner's title insurance policy can.
Alternative To A Title Policy
A warranty of title essentially confirms that the seller has the legal right to transfer ownership to the buyer. It also guarantees that no one else can claim the property. The warranty gives the buyer legal recourse against the seller if someone else claims the property.
Many transactions include a warranty of title by default, but some do not. It is possible that auctions, estate sales, and similar situations in which the seller is acting on behalf of the owner rather than the actual owner may not include a warranty of title since the representative may not be aware of any conflicting claims. Home buyers may still want to consider purchasing title insurance in such a situation.
How Much Is Title Insurance?
There can be differences in title insurance premiums depending on your insurance provider and state. A policy can cost $500 – $3,500. The seller can include the cost of an owner's policy in the property sale.
This is necessary to ensure the safety of all parties involved. Typically, insurance is initiated by a third party after the property purchase agreement has been completed. It is common for both the lender's policy and the owner's policy to play a role in this process. The one-time fee mentioned above applies to both policies.
Can You Lower Your Title Insurance Costs?
If a state has more restrictions on insurance, title insurance rates will remain the same. However, that is only the case in some states. Check your state's laws for how to lower title insurance costs.
Do You Really Need Title Insurance?
Non-purchase of owner's title insurance can have dire consequences. Upon purchase of the property, unpaid property taxes, outstanding liens, or fines for code violations will fall solely on the uninsured homeowner. It is almost always mandatory to have a lender's policy, but an owner's policy is optional.
As long as the homeowner owns the property, title insurance protects them. You could pay much more than you bargained for if you cannot cover these unexpected costs.
If you fail to make these payments, you may lose your home to the entity that has come to collect it - all through no fault of your own. The same applies to any complications with the chain of title. Without title insurance, your dream home can become a nightmare.
The Bottom Line
Title insurance is divided into lender's title insurance and owner's title insurance. When a claim is filed against a title, title insurance protects the insured from financial loss. Back taxes, outstanding liens, and conflicting wills fall under this category.
Borrowers purchase lender's title insurance to protect lenders from these claims. Title insurance of this type is the most common. Lenders almost always require borrowers to obtain lender's title insurance since it is too risky not to. It leaves the buyer potentially vulnerable to financial risk if the title is defective. The seller usually purchases the owner's title insurance to protect the buyer against title defects. Owner's title insurance is also less popular between the two.
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