August 16, 2021
Making sure you can buy a house and having some knowledge of title insurance are fundamental steps in purchasing a home. But what is title insurance? Do you need it? And how does it work? This article addresses these questions.
What Is Title Insurance?
Title insurance is a coverage plan that insures private or commercial property owners and mortgage lenders against failures connected to the property’s title or ownership. It can also be defined as a third-party covering policy on property claims that don’t occur in the early title search but come up after closing the real estate deal. So the two terms you need to understand before going in-depth are ‘third party’ and ‘title.’
- We distinguish a third party as anyone other than the property’s owner, e.g., a building constructor who worked on the house’s former owner and didn’t get paid for it.
- The term ‘title’ is a legal word that means you have the legal right to possess the property, and you obtain this title when the owner transfers the official paper over to you.
A title insurance claim can come up anytime, even if you have owned a real estate property for years. For example, someone may have ownership rights to a property that you didn’t know about when buying the house.
Sometimes, even the owner that had sold you the house might not have been aware that someone else had a claim on the property. This is why you need home title insurance.
When it comes to loans and mortgages, the lender of your mortgage is bound to order a title exploration from a title company before the home loan closure. This company looks for public records connected to your property and inspects any title flaws—such as easements, encumbrances, or lien—that could influence the purchaser’s or lender’s property rights. It also ensures there aren’t any erroneous surveys and unresolved building code violations, flaws that stain the otherwise clear title.
More Details on Title Insurance
What is title insurance, and what is the duty of a title company? Title companies research your deeds, judicial separations, decrees, tax records, orders for child support, and mortgages, which are all matters of public record.
- A contractor, lender, or the IRS who hasn’t been paid can place liens on your property.
- An easement is when someone (not the owner) has the right to use your property. For example, suppose any utility lines (pipes, cables, systems that transfer power, water, gas) go through your yard. In that case, the utility services or companies need to have an easement that authorizes them to access your property.
- The title insurance policy also has financial encumbrances—including liens and easements and conflicting wills—given by homeowners associations and tenants under a lease.
- Regarding title insurance cost, the typical starting price of title insurance is about $300.00 and can increase to $2,000.
- The two types of title insurance include lender’s title insurance (loan policy) and owner’s title coverage.
NOTE: Commercial property insurance can help cover your home and home-based business, protecting your contents if damaged or lost—including inventory, electronics, and any specialized equipment. With commercial insurance, you can ensure that your home-based business is adequately protected, inside and out.
What Is Owner’s Title Insurance?
When you purchase a home, you receive a deed, proof that the seller has transferred its legal title to their house in your name. An owner’s policy is usually provided according to the amount of the buying price of the real estate, and it stays in force as long as the homeowner (or successor) keeps possession of the property.
Besides pinpointing the risk ahead of the completion of the transaction, the owner’s policy will cover valid claims and all protection expenses against title attacks. In addition, the owner’s title insurance guards you against any issues connected to your life estate deed or property possession that might arise after you purchase the house.
Homebuyers need to be aware that there is a possibility the past owners haven’t sorted out their paperwork correctly or that they may have been dishonest or have engaged in fraudulent activities related to the home. The owner’s title insurance policy covers some potential problems, including:
Inaccurately Filed Deeds
If a deed isn’t noted in your legal name, it’s considered a mistake on the deed, and, consequently, the ownership of the real estate could be misconstrued.
Falsification on the Deed
Title insurance can help with law violations, such as fake signatures or modified details about the property.
If your landline has been compromised or your neighbor builds a wall or fence, this can affect your property rights. Title insurance helps with improvements on your property.
Liens are declarations of debt arranged against the property. They can come from a homeowner’s alliance if a fee wasn’t charged, an unpaid contractor for his finished work, or from state institutions if taxes are not paid.
The previous owner could have faked payment of the mortgage, steering the past money-lender to foreclosure.
Perhaps some other party has rights to a portion of your land, e.g., a public utility company, but this is not uncovered while the buying process is in motion.
In each of these cases, someone can try to claim your property, which is why the owner’s title insurance helps reduce the risk to a buyer, who might be oblivious to existing issues. Even though a title search is completed before you buy, an issue may not come to light until you own the property.
According to the National Association of Independent Land Title Agents (NAILTA), regarding the owner’s title insurance cost, the typical amount of an owner’s title insurance policy is about $1.374 for a home—priced at the national median value of $200,000.
NOTE: Fire caused the most costly homeowners insurance claims, accounting for 25% of claim costs—though it wasn’t one of the most common claims filed. In terms of total claims cost, all other top perils included incidents that made the most common claims list: 20% hail, 17% non-weather water damage, 17% windstorm damage, and 7% weather-related water damage.
|Title insurance is indemnity insurance that guards the homebuyer and borrower against monetary loss sustained from faults in a title to a property.|
|There are two types of title insurance: lender’s and owner’s title coverage.|
|The owner’s title insurance protects the homeowner if someone sues and declares they have a claim against the home, even before the owner bought the house.|
|Title insurance (including the two types) doesn’t cost more than $2,000.|
What Is Lender’s Title Insurance?
Banks and other financial institutions become anxious about the safety of the money they lend to land and building investments. Therefore, loan policies act as a safety tool against monetary loss from title hazards.
Recognizing these risks, the title industry plays an essential role in motivating lenders to fund mortgages—more than in other assets with lower risks—ensuring lenders’ valid and applicable liens. They also guarantee that there won’t be other claimants—other than those written in the policy—who could have earlier claims against the property.
The lender’s title insurance policy guarantees that the borrower or purchaser owns title to the property pledged as safety backing for the loan. This policy also requires the title insurer to finance the defending title against any claim that can replace the lender’s lien.
Another advantage is the proficiency of the title company specialists, who smooth out mortgage loan procedures and aids in solving the differences between the various parties in a transaction.
This can cover almost anything from legal assistance to a residential loan to help with the versatile legal and monetary aspects of a manifold, heavily financed commercial transaction. The commitment for the lender’s title insurance can be expressed in even more complex examples, as the title company’s endeavor on the lender’s behalf can go even further.
According to NAILTA, the lender’s title insurance policy costs up to $1,374 for a home—priced at the national median value of $200,000 (same as the owner’s title coverage).
NOTE: If you wish to be protected against damage caused by fires, critical storms, hail, sleet, or other disastrous natural events, you need hazard insurance. Depending on your policy, as a property holder, you’ll receive compensation to cover the cost of any damage.
How Does Title Insurance Work?
What does title insurance not cover? It doesn’t necessarily cover issues that arise after buying real estate. And it doesn’t protect the owners against every violation of their property rights. For example, it doesn’t guard you against problems caused by neglect, or if you fail to pay the contractor that built your house, or fail to pay property taxes.
Real estate title insurance cannot guard you against eminent domain (the government’s power to take private property for public use). But it can protect you from title flaws that can influence the fee of simple ownership of the real estate, which insures you against losses and damages if the property cannot be sold or cannot be used and obtained by the buyer.
How to get title insurance? When you start purchasing property, your closing agent will begin getting you the title insurance, which is usually done after signing the purchase agreement. Your attorney or closing agent can help you choose the right title insurer for you. You will most likely need to pay a one-time fee of about $1,000 for the title insurance.
Who does title insurance protect, and who needs it? This insurance service provides an extended range of protection for many different parties, each of which has diverse interests in the real estate business. As a result, various people and companies need the benefits of title insurance, including:
- Home sellers
- Homebuyers (land, real estate purchasers)
- Lending services (lenders)
- Immovable brokers
Do I need title insurance? If you want peace of mind from financial loss to property-related problems not attributed to you, you should obtain title insurance. All the advantages that title insurance offers outweigh unnecessary risks.
Title insurance costs less than 1% of the real estate purchase price, which may seem costly to some. But it can be seen as a low-cost peace of mind insurance since it stays in action as long as the holder owns the property.
While the lender’s title coverage is needed, the owner’s title coverage is non-mandatory. For example, if you buy a new home, there could be faults or defects because it had a previous owner whose builder didn’t pay all its contractors. In this case, an owner’s policy can protect you against losing the buyer’s equity and the right to live in the home if any other claims arise.
The title coverage defends the homebuyers and lenders from defects or issues with a title when the property ownership transfer occurs. If a title dispute develops during the sale or after, the insurance company might be accountable for compensating legal damages.