Imagine this: You are about to embark on the biggest purchase of your life. You've done all the research, found the perfect house, and now it's time to sign on the dotted line. But before you do, there is one thing you need to take care of first: title insurance.
If you're like most people, you probably don't pay much attention to the title insurance industry. But even if you've never purchased a home, the chances of you hearing the word ‘title insurance’ are higher than ever before. That's because there has been an increase in the number of real estate transactions over the past few years and now is as good of time as any to learn what all this fuss is about with regards to title insurance.
In this article, we’ll discuss what title insurance is all about and the various aspects you should consider before making a final decision. Read on to find out more.
What Is Title Insurance?
Title insurance was first offered by the State Title Insurance Company in Chicago, Illinois in 1868. Today, there are more than 40 companies that offer title services throughout the United States under various names such as American Land Title Association (ALTA), National Association of Independent Fee Appraisers (NAIFA), and American Land Title Association of Arizona (ALTAZ). Essentially, title insurance is a contract between the insured and insurer in which the insurer promises to pay all sums necessary to repair any damage to a property owner's rights or interests in a property. This applies even if it isn't discovered until after closing.
What Does This Have To Do With Real Estate?
In real estate transactions, there are risks involved that you can't plan for. This includes everything from someone else owning part of your land to environmental hazards buried beneath your home. In order to protect themselves from these dangers, both state legislatures and individual insurers provide policies that reimburse the policyholder for damages.
What's Covered By Title Insurance?
The goal of purchasing title insurance is to ensure clear and unencumbered ownership so buyers don't have to worry about anything hidden in the legal fine print after they've purchased a home. Typically, this includes protection against issues related to wrongful deeds, unpaid taxes, liens, and other encumbrances.
What Are Title Defects?
One of the biggest problems that can happen in your home is a defect in title. Title defects happen when there is something wrong with the deed for your property. This may even cost you money out of your own pocket if you don’t have insurance coverage.
Title defects include:
This occurs when someone buys property intending to make money by reselling it to another person without disclosing real ownership.
A contractor, property tax authority, or lender who has not paid might place a lien on the property. As a homeowner, you don't want to be responsible for the unpaid bills and unpaid taxes of the prior owner.
Improperly Recorded Documents
If documents are improperly recorded, future owners and lenders will have trouble ascertaining the rightful property owner. If there's no record for something as crucial as property ownership, it can become difficult to sell or insure an asset and take out loans on that property.
This is when a false title deed is created to use it as if it were genuine.
The term encroachment refers to a situation in real estate where one property owner intentionally or unintentionally violates the boundaries of his neighbor's land with buildings, structures, and extensions.
These are the rights of others to utilize your property even if you own it. For example, if you have utility lines in your backyard, the utility company will have an easement that permits them to access your property.
Now that we have explained the different types of title defects, let's examine what kind of policies a title insurance company offers.
Types Of Title Insurance Policies
The title insurance policies available to title owners and title lenders vary widely, partly because each state or country has its requirements for title issues that title policies must cover. The owner's title insurance (an owner's policy), which protects the buyer, and lender's title insurance (a loan policy), which covers the lender, are the two types of title insurance.
Owner's Title Insurance Policy
An owner's policy guarantees that the title insurance company will stand behind the owner if a title problem emerges after the home is purchased. It is granted in the amount of the acquisition price of the property.
Lenders Title Insurance Policy
A lender's policy makes sure that when you refinance your home or take out a new mortgage loan, the lender protects their investment. The process involves mandating the purchase of a lender's title insurance policy to cover losses resulting from claims filed against your new home by others.
The Title Insurance Policy Process
When the escrow officer (or even the lender) starts up the title order, a title agent or an attorney begins the title search. The customer is given a first draft report to study and sign. Upon escrow's request, all closing paperwork is recorded. Demands are fulfilled, money is distributed, and the genuine title insurance policy is issued once the recording is confirmed.
What Is Escrow?
Escrow is a process where a third party, usually a title company or attorney in real estate, holds the proceeds of a transaction (for example the sale of a property) pending the deal's completion.
What Can I Do To Protect Myself?
Since lenders require title insurance on most home transactions, most people assume it's mandatory and don't bother to do any research. While most experts agree that it's probably not wise to pass on this type of insurance, there are alternatives available for homeowners who want more control over their coverage options. Title insurance is important, especially for first-time buyers who should be especially wary since they've never gone through this process before.
How To Purchase Title Insurance
Following the completion of the property purchase agreement, a real estate agent starts the insurance process. You can purchase title insurance directly from a title insurance company or from a title agent who works for a company that sells title insurance.
Four major title insurance underwriters in America carry out the process:
What Is The Title Insurance Cost?
A one-time title insurance premium of 0.50 percent to 1% of the home's value is charged for title insurance. Your state may or may not regulate title insurance, so do your research in advance. The premium is also often paid as a closing cost.
The Difference Between Title Insurance Policy And Homeowners Insurance Policy
Title insurance covers damages caused by faults in the title. Title companies search and evaluate title plans or public records before issuing a title insurance policy to detect liens, claims, or encumbrances on the property and warn you of potential title problems. With title insurance, there is a one-time premium due at the end of the escrow period.
On the other hand, homeowner's insurance covers your home and its contents, as well as damages caused by fire or lightning, theft, vandalism, and personal liability claims filed against you, the policyholder. Premiums for homeowners are frequently payable monthly, quarterly, or annually, with installment payment options available.
What Are The Pros And Cons Of Title Insurance?
Pros Of Title Insurance Policy
The most common benefit of a policy is that it protects the holder from any financial loss due to any errors or omissions in the records about the property ownership rights. These policies will cover both lenders and borrowers against losses as long as they meet the title insurance policy's requirements.
According to the Federal Trade Commission (FTC), mortgage lenders can purchase this type of protection for their customers in a process called lender-placed coverage, which also helps protect the lender by reducing risk and closing time.
Another benefit is that legal damages resulting from title defects can often be recovered under the title policy.
Internal and external endorsements may also be added by the title insurer. These clauses provide special coverage in cases where there is a history of fraud on the part of the previous owner or any other party involved with homeownership.
This type of insurance coverage is essential when buying a home from a seller or party, as opposed to new construction. In the case of new construction, all parties involved may be protected by an implied warranty of title.
Cons Of Title Insurance Policy
If a home buyer purchases mortgage title insurance with their lender-placed coverage, then they won't be able to buy another policy from other providers, which could lead them not being able to recover the cost of it.
Purchasing lender-placed coverage can be risky. If the purchaser does not have enough time to review and understand what is being offered thoroughly, they may get themselves into an unpleasant situation where their home could be in jeopardy of getting foreclosed on.
Questions To Ask Before You Buy Title Insurance
A real estate transaction is probably one of the most significant transactions you will ever make. Therefore, it is crucial when shopping for title insurance to ask the following question regarding a title agent or company:
With so many different insurance companies on the market, it's hard to know which one will be best for you. Make sure you call more than three companies to be able to properly compare all the offers. The above questions will help you choose the best insurance company.
The Bottom Line
Title insurance is a one-time expense that provides peace of mind for the duration of a property's ownership. While the possibilities of a title issue occurring after closing may appear remote, the implications may be too severe to overlook.
Taking the time to understand your options and actually buying the right insurance is a decision that will always be worth the time and money investment.