Buying a home is one of the biggest purchases you’ll make in your lifetime. It can also be one of the riskiest. When you’re navigating the final stages of the home buying process, the last thing you want to discover is that you’re also inheriting outstanding debts, or that an unknown heir has a claim to your home. That’s where title insurance comes in handy.
In this article, I will answer all your basic questions about title insurance, including:
Let’s get started with this topic.…
What Is Title Insurance?
A title insurance policy protects you and your mortgage lenders against any issues that could arise when you’re purchasing your home. If your home’s title is clear and free of any unpaid debts or ownership disputes, you can rest easy. If it isn’t, you may find yourself responsible for paying the last owner’s liens, or find yourself in a legal dispute for the ownership of your home.
What Is A Title?
A title is a document that proves you legally own an asset or property. These can be tangible (something you can physically touch), like a house or a car, or intangible, such as a patent or copyright. To get a title, you need to either buy or inherit the asset.
Why You Need A Clear Title When Owning An Asset
A clear (or “clean”) title is a property title that solidifies your legal claim to ownership. This means your property title is free from the following:
As a home buyer or seller, you can search for a property title’s history to discover what’s been officially recorded. However, you need to hire a title company to make sure everything gets checked.
What Is A Title Company?
A title company is a third party that conducts an in-depth title search to determine if the title is clear.
When you buy a title insurance policy, you’re protecting your property from any liability you could otherwise incur. Title companies research the property’s full ownership history, look for existing liens, and make sure that all property taxes are paid and up to date.In rare cases, this role may also be relegated to your lender, closing agent, or escrow company. More often than not, your mortgage lender will hire a title agent to perform a search title for them.
Why Do You Need Title Insurance?
When you’re purchasing your home, you’re also purchasing all the assets and liabilities associated with the property. Title insurance protects you by:
How Does Title Insurance Differ From Other Types Of Insurance?
When you purchase other types of insurance, like homeowner’s insurance, life insurance, or car insurance, you’re getting coverage against potential future events. Title insurance protects you from the past events that might have occurred in your property by its previous owners.
While other insurances have monthly or yearly premiums, title insurance only requires a one-time premium paid when signing your closing escrow documents.
Types Of Title Insurance
There are two types of title insurance: Lender’s title insurance and Owner's title insurance. These give you (the owner) and the lender financial protections during the real estate transaction.
Lender’s Title Insurance Policy
A lender’s title insurance policy (also known as a loan policy) safeguards them from any title disputes that occur after a purchase is completed. Mortgage lenders usually require the home buyer to purchase the lender's title insurance during the process so they can avoid loss if problems with the title arise.
The costs of this title insurance are tied to the amount the lending institution is loaning you.
Owner’s Title Insurance Policy
As a home buyer, you need to make sure you’re protected. An owner’s title insurance policy protects your rights, usually until either you or your heirs transfer ownership of the property. When you purchase the title, you’re buying the property and all debts—known or unknown—associated with it, hence why you want to ensure the title is clear.
In short, a lender’s policy insures your lender, while an owner’s policy insures you.
Both the lender’s policy and owner’s policy help minimize risks. The title companies conduct thorough research before issuing them, because once they do, they’re at fault if something negative had to happen.
In the event that a title can be contested, the title insurance policy covers the legal defense fees and the pay for valid claims. Neither you nor the lender will be held accountable for errors made on the title company’s end.
Buyers Or Sellers: Who Pays?
Deciding who pays for title insurance coverage can be negotiated between the seller’s real estate agent and yours. In some parts of the country, the seller traditionally purchases the owner’s policy for the buyer, and vice versa. Ask your agent what’s customary in your area.
How And When To Purchase Title Insurance
You typically buy a title insurance policy(s) upon completing the property purchase agreement, which governs the purchase and sale of your home. Often, both a lender’s policy and an owner’s policy are required to ensure everyone has coverage.Usually, the cost of a title insurance policy is anywhere between .5% and 1% of your home’s value. This depends on what state you live in and who you or the seller’s insurance provider is. As mentioned earlier, the cost is a one-time premium.
How To Buy Title Insurance
Your lender and your real estate agent often have a go-to title insurance company in their network. It’s unlikely that they’ll steer you wrong, especially if they have been in business for years.
However, you’re not required to use the title insurance company they recommend. Feel free to do your own research. Shop around for an owner’s policy or a lender’s policy to find the title company that offers you the best protection for the best price.
Here are a few tips and tricks for getting the best deal:
Negotiate With The Seller
When it’s a buyer’s market, the home buyer has more leverage. They can negotiate big ticket items, like the purchase price of a home, and smaller things, like who’s paying for the property’s title. Sometimes the seller will agree to it. Other times they won’t. Still, it seldom hurts to ask.
Buy Both At Once
If you can’t convince the seller to buy title insurance, you can ask if you can buy the owner’s policy and the lender’s policy at the same time. This is known as the ‘simultaneous issue rate.’
Even though the two insurance policies are separate, some title companies will let you save money by buying both simultaneously.
Do Away With Add-On Fees
A title insurer usually can’t make too many adjustments to their rates. Therefore, home buyers may have trouble finding stark contracts in title policy premiums.
However, you can try to negotiate the add-ons. When you buy a title policy, there are usually extraneous fees associated with the transaction. Some of these fees include:
Give your title insurance company a call and ask if they can remove some of these fees. If they refuse, you can either stick with them or take your business elsewhere.
Check With Your Lender
When making a real estate purchase, your lender may be open to offering you a discount on closing costs. Sometimes they will offer lender credit if you agree to a higher interest rate. While you’re working with them on escrow, it doesn’t hurt to weigh your options.
The Risks Of Not Having A Title Insurance Policy
While buying lender’s title insurance is all but required, purchasing owner’s title insurance should be a no-brainer. It’s a one time fee, and the coverage protects you from an unexpected issue or unwanted financial burden.
Here are three things title insurance protects you from:
Let’s look in more detail at each of these points.
Losing The Ownership Of Your Property
Imagine buying a piece of real estate only to discover afterwards that it’s co-owned by someone else. If the seller co-purchased a home with a spouse and never got them to sign off on the deal, the spouse can still claim legal ownership rights of the property. If they do, you could lose it.
When you have an owner’s title policy, the coverage provided will protect your ownership rights, and the company will handle title issues on your behalf. It’s highly likely that the title company would’ve discovered this problem long before signing off on your policy in the first place.
Lose Part Of Your Property Due To Encroachment Issues
Title insurance protects against encroachment issues, like having a shed that crosses onto your neighbor’s property. If you don’t have title insurance, you and your neighbor must agree on how to handle the situation. It could involve legal proceedings, or you having to pay the costs of moving the shed or taking it down.
Pay The Debt Of The Previous Owner
If the previous owner hired a contractor to do a bathroom renovation and didn’t pay for it yet, the contractor could put a lien on their property. A lien would usually come up during a title search. They could even place the lien after the title company conducted the search. Either way, if you purchase the property without title insurance and the lien shows up, it’s now your responsibility to pay that contractor.
Liens can also be the result of unpaid property taxes or other back taxes. No one wants to assume someone else’s unpaid taxes or have to pay for a renovation they thought was already paid. These are common claims filed that can easily be avoided.
Title companies search for these things all the time. The peace of mind you’ll get by purchasing owner’s title insurance is well worth its one time fee.
What Is Title Insurance? FAQs
See the most asked questions
Depending on the company’s policy, a title warranty might not apply for a foreclosed property because they are riskier investments. Your real estate agent needs to do their research and speak with a title insurer about the property before you decide to buy it.
Your agent should also ensure that the title insurance policy you buy protects you from any liabilities you’d otherwise be responsible for once you make the home purchase.
Time insurance doesn’t cover every property-related claim. Here are a few things it doesn’t cover:
In short, yes. Conflicting wills are actually one of the most common claims that people file against a title.
In addition to conflicting wills, other common claims include back taxes and liens from an easement, a mortgage loan, or a HELOC (home equity line of credit).
When you sign all your closing paperwork, it can be easy to lose track of a document or two. If you’ve lost your policy, here are a few ways to obtain a copy:
Final Thoughts On Title Insurance
As a new home owner, you have so many things to focus on, like making it your own and paying your home loan. You shouldn’t have to worry about potential skeletons the last owner left in the closet. Secure your home’s future by buying owner’s title insurance, then focus on the more important things in your life.