What Is Title Insurance?
Title insurance is a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property. The most common type of title insurance is lender’s title insurance, which the borrower purchases to protect the lender.
Even if you’ve owned the property for many years with no problems, a title dispute could develop at any time. What are the chances of this happening? When you make an offer to purchase a property, you should be aware that someone else may have ownership rights that you are unaware of. Even the current owner may be unaware that the property is subject to a claim by someone else. Even the individual who has those rights, in the event of an overlooked heir, may be unaware of them.
Your mortgage lender will order a title search from a title company before your home loan closes. The title firm looks for liens, easements, or encumbrances on your property in public records to see if there are any title flaws that could impair the lender’s or buyer’s property rights.
- Liens can get placed on the property by a contractor, tax authority or lender who hasn’t been paid. You don’t want to get stuck paying a previous owner’s unpaid bills.
- Easements are someone else’s right to use your property even though you are the owner. For example, if there are utility lines in your backyard, the utility company will have an easement that allows them to access your property if they need to work on the lines. The easement could limit your ability to use your property however you want.
- Encumbrances include liens (also called “financial encumbrances”) as well as easements, but also include zoning laws, restrictive covenants imposed by homeowners associations and leaseholder rights.
Deeds, mortgages, divorce decrees, court judgments, tax records, and child support orders are among the public records that a title business searches.
If any difficulties (also known as “clouds”) are discovered during the title search, the title firm will attempt to fix them. Your real estate agent may need to collaborate with the seller’s agent in order to get the seller to remedy the issue. In other circumstances, the issue may be substantial enough to cause the sale to fall through.
Types of Title Insurance
There are two types of title insurance: lender’s title insurance (also called a loan policy) and owner’s title insurance.
The financial interests of the corporation that issues the mortgage are protected by a lender’s title insurance policy (just like mortgage insurance does). It ensures that the lender has priority over all other liens on the property. Any time you take out a mortgage, whether you’re buying a property or refinancing, you’ll need to obtain lender’s title insurance. According to Prairie Title in Oak Park, Illinois, if your loan is less than 10 years old, you may be eligible for a discount when refinancing.
The lender’s title policy coverage must be at least as much as the mortgage principle, according to major mortgage investors Fannie Mae and Freddie Mac, who regularly buy home loans from lenders after closing. The lender’s coverage decreases as you pay down your mortgage principal.
The homebuyer is protected by an owner’s title insurance coverage. The coverage amount for an owner’s policy is normally equal to the purchase price, and it stays the same for as long as you or your heirs hold the home. This is an optional policy that only needs to be purchased once.
Title Insurance Costs
Title insurance is a one-time, one-time fee, not a recurring cost. An owner’s policy is based on the purchase price of the home, whereas a lender’s policy is based on the amount of the loan. According to the American Land Title Association (ALTA), a big national trade group of title professionals, these policies typically cost about 0.5 percent to 1.0 percent of the home’s purchase price, or $1,500 to $3,000 on a $300,000 home.
In some states, the cost of title insurance is the same regardless of which firm you select. In some cases, buying around can save you money.
You have the option of choosing which title insurance company to utilize as a homebuyer. You may receive recommendations from the seller or your real estate agent, but you should conduct your own research before acting on their advice.
Because your lender’s financial interests in the property are aligned with yours, you can trust their advice. Some lenders, on the other hand, have a financial stake in the title businesses they refer borrowers to.
The owner’s policy can be paid on behalf of the buyer by either the buyer or the seller. Who pays is frequently determined by local real estate custom. Purchasing an owner’s insurance at the same time as a lender’s policy can result in a “simultaneous issuance charge,” which lowers the cost of the owner’s policy.
How Title Insurance Works
An owner’s title insurance policy might cover the costs of paying off a previously unknown lien or fighting against a lawsuit brought against you by someone claiming ownership of the property. It can also provide a cash settlement to a new owner who accidentally purchases a property with a counterfeit deed from a fraudulent vendor who did not own the property. Furthermore, owner’s title insurance safeguards your capacity to sell your house in the future if an issue is discovered during a subsequent title search.
However, title insurance does not cover all potential infringements on a homeowner’s property rights. It doesn’t, for example, shield you against title issues created by your own conduct, such as neglecting to pay the roofing company or failing to pay your property taxes. It also doesn’t cover eminent domain, which is when the government seizes private property for apparently public reasons.
Let’s imagine you lose your home because it turns out you were duped into buying it. You’re not going to be able to keep up with your mortgage payments. The lender will then submit a claim with its title insurance provider in order to recover the mortgage payments it expected from you.
In other cases, if you stopped paying your mortgage, the lender could foreclose and sell the house to collect its losses. However, if it is discovered that someone else owns the property, foreclosure is not an option.
Is Title Insurance Required?
Owner’s title insurance is voluntary, but lender’s title insurance is obligatory. If a claim develops after the purchase, an owner’s policy can protect you from losing your equity and your right to reside in the house. Even if you’re purchasing a brand-new home, faults may exist due to prior owners of the land and the builder’s failure to pay all of its contractors.
These are some of the issues an owner’s title policy can protect you against:
- Property survey errors
- Boundary disputes
- Errors on the property deed
- Building code violations by a previous owner
- Conflicting wills
- Claims by an ex-spouse who didn’t authorize the sale
- Claims related to a forged power of attorney
- Liens from contractors, taxing entities or previous lenders
- A former owner’s unpaid child support
- Improperly recorded documents
An owner’s title insurance policy, like many other types of insurance, can feel like a waste of money if you never use it. However, it’s a minor fee to pay to protect your interests if your title is challenged after you’ve closed on your home.