Buying a home can be a risky business, especially if you’re a first-time buyer. There are a lot of legal and financial issues you need to manage throughout the home buying experience. There is no need to make things harder on yourself by requiring you to have the burden to do your own title search. That’s why most home buyers purchase title insurance.
Title insurance is a type of insurance essential to prevent loss against legal or financial claims against the title and ownership of a home. That’s why we are covering the basic overview of title insurance.
What is title insurance?
Title insurance allows a lender and buyer to rest assure they are purchasing a property that is “free and clear” of any legal or financial claims against it. You may have heard of the term ‘indemnity insurance’ before, i.e., a sort of contractual obligation that ensures compensation by one party (the insurer) to the other (the insured) in case of any losses incurred to the latter by acts of the former.
Well, title insurance is one type of indemnity insurance in home buying. It protects homebuyers and lenders (people or companies from whom loans might have been procured to buy a property) from financial losses that may result from dissatisfaction in legal or financial problems involving the property title. These problems also include any falling-out caused by a ‘bad or defect title’ like a lien on the property, i.e., a legal right or claim that is in place to satisfy a debt, back taxes, an unpaid contract by the sellers, or any violations in the building/ property itself.
Some of the more common risks that title insurance covers are:
- An unknown or undisclosed heir with claims against the property
- A forged or falsified deed
- Public record errors
- Undisclosed liens (or unpaid taxes)
- Undisclosed encumbrances
- Fraudulent acts
Although some of these issues are easy to identify, you risk losing ownership of what you’re buying if you manage to miss one. For example, you could lose a part of your property due to encroachment issues, or you could be forced to pay debts that belong to the previous sellers, like those filed by previous renovators, etc. So the insurance company provides an additional insurance policy that stands to defend you from certain uncovered issues.
How insurance companies work
Whenever a property is financed, bought, or sold, records related to this transaction are stored in public archives. These archives also hold information regarding any previous property owners and any liens or levies on it.
So when you buy title insurance for a house, building, or some land, the title company searches through these archives for any background ownership issues, undisclosed claims, or any of the issues mentioned previously and tries to remedy them. This is done to determine the house or property ownership status, thereby ascertaining the title’s insurability.
Title insurance guarantees (subject to the policy limitations) that the title is good and marketable. If there are problems with the title in the future, the title insurance company is responsible for any shortcomings–not the owner or the lender.
In simple words, title insurance is an investment in your property that affords legal insurance along with protecting you from future risks or claims that may threaten ownership, so it’s a little money spent for peace of mind for as long as you have interest in the property. It is a one-time premium paid at closing. Who is responsible for paying for the policy (seller or buyer) and policy inclusions and exclusions will vary depending on what is customary in your local area.
Lender’s vs. owner’s title insurance
There are two types of title insurances, depending on the person’s position or interest.
Lender’s title insurance (lender or mortgage protection)
The term ‘lenders’ refers to people who provide the loan for a mortgage or some other required payment. The lender’s policy is to protect the lender’s interest in the property and provide security against any financial losses that may occur if the seller cannot transfer ownership rights to the owner (also the current buyer).
Lender’s insurance is required by the lender to secure a loan for the home because it protects and insures them against any problems in the property title (i.e., it covers the amount they’ve lent to the buyer). Because this insurance does not protect the borrower’s investment in the property, it is highly recommended the buyer secure their own form of title insurance, called “Owner’s title insurance.”
Owner’s Title Insurance
Owner’s title insurance is used by the buyer or owner of the property to protect themselves against financial losses and legal claims that may occur due to outstanding taxes or debts on the property, defects in the title, or sometimes even no title at all. An issued policy means a thorough completion of title search and resolution of any issues found, so it imparts assurance to the buyer from hidden risks.
Protection of hidden risks is important because it provides security from previously unknown defects (such as those mentioned above) in title or claim to the property, most important of which are unknown heirs, forgery, fraud, or clerical errors in the records filed in the archives. It also protects against loss caused by any claims covered in the policy. Most importantly, it pays the attorney’s fees and costs required for defending any claims violated that were covered in the policy.
Your title insurance also affirms marketability in the future and that the sale won’t be stopped because of defects in the title or outstanding liens.
Owner’s title insurance is NOT “homeowners insurance”
Do not confuse the owner’s title insurance with homeowner’s insurance. These are two different concepts and confuse home buyers often. Title insurance protects your right of ownership to property and defends against any future risks that threaten your ownership status. In contrast, homeowner insurance is insurance on the property itself that helps cover financial costs if some harm comes to it or is damaged due to any disaster like a fire, a storm, an earthquake, etc. It can also cover you in case of theft, aid in the payment of repairs, or help pay medical bills if someone is injured while on your property, but it does not cover you against claims against the property’s ownership or title.
When to buy owner’s title insurance
Most people wrongly believe that they only need to purchase an owner’s title insurance if they are buying a single family home or property; one that had other previous owners. With this belief, many people skip over insurance when it comes to certain other cases, which can prove very harmful, both legally and financially, in the future. Some common purchases where people are not sure about this issue are listed below.
A condo is a type of living space, similar to an apartment, but that is independently sellable (individual units are sold from part of a larger building or infrastructure). The homeowner owns just the airspace of their unit and not part of the building’s land or any part of its actual structure.
Now you might be thinking that since you only hold ownership of the space and not the land itself, title ownership wouldn’t be necessary? That’s a complete misconception. In the case of condos, a title search will reveal any defects in title or problems associated with the building or complex itself, such as illegal encroachment on land, liens filed by contractors, etc. This means that the borrower won’t be held liable for unpaid bills or liens against the condominium association once the insurance policy is bought.
In this specific case, the lender’s title insurance will include special ‘condominium endorsements’ to protect their interests.
Even if you buy a brand new house, condo, or apartment that wasn’t previously owned by anyone, you’ll still need title insurance for the land it is built on. This will also protect you from disputed payments between the developers and the contractors.
New construction may also refer to you buying an empty lot to build your own home. In this case, surveys determine the boundaries of the lot or piece of land you’re buying (which was previously unimproved) to prevent any encroachment claims in the future.
Refinancing in real estate means trading in your old mortgage deal for another, new deal. The lender pays off the old debt with the new one and offers you another debt obligation.
In this case, the lender will require you to purchase a new lender’s title insurance policy. However, a new owner’s title insurance policy is optional since the policy you purchase once stays in effect as long as you are the home or property owner or have any interest in it. That is, you don’t need to renew or replace it unless you want to or specifically required by the lender.
Foreclosed homes are those that are now bank-owned or owned by the lender when the owner fails to pay the mortgage payments on time or falls behind them a lot. You can buy a foreclosed home through an auction, a court, or bank. Either way, you’ll require a title insurance policy.
Your insurance will protect you against falsified documents, mistakes in legal aspects of the title, or errors made in a title search. First, you’ll have to buy the title, i.e., take ownership of the home, become the owner, then once the redemption period expires, get the deed of the property and finally get your title insurance policy.
Cost and payment
By now, we hope you are convinced of the importance of buying title insurance. But what does it cost, you may be asking. And there’s also the question of who pays for the insurance? The answer may surprise you: both! Both the home buyer and home seller pay for the insurance. Continue reading the brief description below for more information.
Lender’s title insurance: paid for by the buyer/borrower
The lender’s title insurance is paid for by the buyer. It’s purchased by the borrower to protect the lender and give them assurance.
Different companies quote different prices depending mainly on the property’s value, the state you live in, and the amount of mortgage taken out for it. Usually, they charge you ‘by the thousand,’ i.e., you get charged for each thousand spent on the house or property. You can usually expect it to be a few hundred dollars to $1,500 per policy.
Some states, for example, Texas, Florida, etc., have premium rates for title insurance already in place, but the insurance company can have additional money on top. Most insurance companies in other states have more flexibility to set their rates.
Owner’s title insurance: paid for by the seller
The owner’s title insurance is paid for by the seller of the property. It gives the buyer assurance that they are purchasing an asset free and clear of any claims, whether legal, financial, or otherwise.
While you can separately purchase both insurance policies, it’s more beneficial to get them in one place, both for legal and financial reasons. Insurance companies mostly charge 0.5% to 1% of the property’s purchasing price for both the owner’s and lender’s insurance policy. This translates to a premium cost in the range of $1,370 to $2,745 for houses with a median value of $274,500. You can also choose to split the settlement costs with the seller for types of title insurance.
Where to buy title insurance?
Several renowned companies in the USA sell insurance and have a good reputation in the business. Two of the most important and trusted companies in buying title insurance are First American Title and USA National Title Company.
First American Title
First American Title Insurance Company streamlines and smoothens real estate transactions by providing comprehensive insurance protections and offering professional settlement services. It extends its services to mortgage lenders, home buyers, real estate agents, home sellers, home builders, other legal agencies involved in this business, and brokers.
You can visit their website for information regarding the different kinds of title insurance issued to different clients, lenders issues, and home warranty issues, or you could visit a local office and get your information directly from an employee or representative. You can also calculate the fee of title insurance by using their calculator. This can give you a good estimate of what some other companies might charge too.
USA National Title Company
USA National Title Company provides title and escrow services to the mortgage and real estate industry to ensure peaceful transactions that leave all parties involved with a satisfied and happy feeling about their deal. Professionals manage the company with extensive experience and developed relationships with those in the real estate business. These relationships are built on trust, good business, and fair, guaranteed deals. You can contact them through their website and go through the complete list of services they provide for the closing process of buying a property.
Wrapping it all up
By now, you have sufficient knowledge of the importance of getting title insurance and its need in different home buying cases. It protects your ownership rights while providing security in case of any background or undisclosed issues. You can find more information specific to your area and needs by contacting a local title insurance company and ensuring that your financial investment is protected.