WHAT IS TITLE INSURANCE AND WHY DO I NEED IT?
For as long as you or your heirs own the property, title insurance is a one-time charge paid when you buy it that protects you from title defects — legal concerns that might prevent a property from being legitimately transferred or sold. It’s basically insurance against a property’s past, and it protects you from financial penalties if there are any difficulties with the property’s title that aren’t revealed.
Mortgage lenders will also demand the buyer to get mortgagee title insurance for the amount of the loan in order to preserve their first lien position in the event that the property is foreclosed on. In other words, a lender wants to protect their investment in the property.
Conducting a comprehensive search of the property’s history is an important aspect of gaining title to it. Using public documents to create a clear chain of ownership and exposing all identified outstanding claims against it, the title company (such as Thoroughbred Title Services) will attempt to detect, prevent, and eliminate any risks or losses that may develop due to title problems.
Future claims against a home, including legal defense costs, will be paid for by the title insurance company rather than the buyer if the owner has title insurance. In a nutshell, title insurance safeguards your ownership of the property by protecting you from future claims.
OWNER’S POLICY VS. LENDER’S POLICY
An owner’s policy is obtained for the same amount as the purchase price and does not expire when the mortgage loan is paid off or refinanced. The owner’s policy exists to safeguard the owner’s investment in the property.
A lender’s policy protects them up to the amount of their outstanding debt on a mortgaged property. The policy’s value falls as the loan principal is paid down, and it expires when the debt is fully paid off.
What Is Title Insurance?
Title insurance is a type of indemnity insurance that protects lenders and homebuyers against financial loss caused by faults in a property’s title. Lender’s title insurance is the most frequent type of title insurance, which the borrower acquires to protect the lender. The owner’s title insurance, on the other hand, is frequently paid for by the seller to protect the buyer’s equity in the property.
Understanding the Basics of Title Insurance
Any real estate transaction requires a legal title. Before a title can be given, title companies must do a search to see if there are any claims or liens against it.
A title search is a search of public documents to establish and confirm legal ownership of a property and to see whether there are any claims against it. 1 Erroneous surveys and unresolved building code violations are two examples of flaws that might tarnish the title.
Both lenders and homebuyers are protected by title insurance against loss or harm caused by liens, encumbrances, or problems in a property’s title or actual ownership. Back taxes, liens (from mortgage loans, home equity lines of credit (HELOC), easements), and competing wills are all common claims made against a title. Unlike typical insurance, which covers claims for future events, the title insurance covers claims for past events.
The following risks are commonly covered by a basic owner’s title insurance policy:
- Another party’s ownership
- Forgery and fraud, as well as incorrect signatures on papers
- Records with flaws
- Unrecorded easements, for example, are examples of restrictive covenants (terms that diminish the value or enjoyment of a property).
- Outstanding lawsuits and liens are examples of encumbrances or judgments against the property.
Title Insurance Types
Lender’s title insurance and owner’s title insurance are the two types of title insurance (including extended policies). Almost all lenders demand that the borrower acquire a lender’s title insurance coverage to protect the lender in the event that the seller is unable to lawfully transfer ownership rights. The policy of a lender solely protects the lender from loss. The conclusion of a title search is indicated by the issuance of a policy, which provides some confidence to the buyer.
Because title searches are not perfect and the owner is still a danger of financial loss, further protection in the form of an owner’s title insurance policy is required.
Owner’s title insurance, which is frequently obtained by the seller to safeguard the buyer against title flaws, is an optional purchase.
Investing in Title Insurance
Following the completion of the property purchase agreement, an escrow or closing agency starts the insurance process. Fidelity National Financial, First American Title Insurance Company, Old Republic National Title Insurance Company, and Stewart Title Guaranty Company are the four biggest title insurance underwriters in the United States. You can also choose from a number of regional title insurance companies.
Owner’s title insurance costs anywhere from $500 to $3,500, depending on where you reside, which insurance company you choose, and how much you paid for your house.
To ensure that everyone is sufficiently protected, a lender’s insurance and an owner’s policy are frequently required simultaneously. The parties pay a one-time cost for title insurance at the closing.
To avoid exploitation, the Real Estate Settlement Procedures Act (RESPA) forbids sellers from forcing the purchase of title insurance from a certain company. The Consequences of Not Having Title Insurance
Without title insurance, transacting parties are exposed to severe risk in the case of a title defect.
Consider a homebuyer who finds the home of their dreams only to discover unpaid property taxes from the previous owner after closing. Without title insurance, the buyer bears the entire financial burden of this back tax claim. They must either pay the back taxes or risk losing their home to the taxing authority.
Title insurance, in the same case, protects the buyer for as much as they own—or have an interest in—the property.
Similarly, title insurance provided by the lender protects banks and other mortgage lenders from unregistered liens, unrecorded access rights, and other problems. If a borrower defaults and there are any concerns with the property’s title, the lender will be reimbursed up to the amount of the mortgage.