In 1876, a Pennsylvania group formed to protect innocent buyers of real estate property, creating the first title insurance company. It became their mission to protect those who are purchasing real estate from losses that occur from liens and encumbrances. Soon after their formation, title insurance companies rooted themselves in other large cities throughout the United States, like New York City, Chicago, Minneapolis, San Francisco, and Los Angeles.
These days, title insurance is a natural part of the home buying process. But what is it really, and why should you care?
Don’t let your dream home become a nightmare
When you buy a home, you might hear those helping you in the process talk about obtaining a “clean title” through a title insurance policy. Getting a clean title shows that you’ll have free and clear ownership rights to the property you’re about to buy from your seller.
But what happens if legal or financial issues arise from the sale? Don’t let your home end up costing you more than the purchase price due to unforeseen complications. This is where title insurance comes in to save the day. These days, a lender’s policy is a must-have requirement to get approved for a mortgage. Let’s see why.
What’s title insurance?
What if you discovered that the property you purchased from your seller wasn’t legally theirs to sell? YIKES! Any past issues you weren’t aware of like outstanding liens, back taxes, and conflicting wills could cause you a lot of trouble in the future. When you make a down payment and plans for a future home, title insurance will help protect you against any issues that could make your claim to the property invalid.
There are two types of title insurance: an owner’s policy and a lender’s policy. Both provide important protections for the different parties in a real estate transaction. Let’s look a little closer at the two and what they cover.
Owner’s title policy coverage
When you get an owner’s title policy, you are covering yourself from the following:
- Conflicting ownership claims – These can arise from wills or unknown heirs
- Lawsuits, liens, and other encumbrances that would invalidate the seller’s legal claim to the property
- Flawed records – These include even the smallest of mistakes, like an incorrect signature
- Fraud or forgery
- Undisclosed agreements that could limit or reduce the value of the property
Lender’s title policy coverage
Before getting a mortgage, a lender will require you, the homebuyer, to purchase a lender’s title insurance policy. The lender will not issue this policy themselves; a title company will do this work. You have the choice of naming the title company you want to serve as your policy issuer, or you can go off the recommendation of your real estate agent, broker, or lender.
If you’re wondering why the heck there’s both a lender’s policy AND an owner’s policy, the answer is in the name. They basically function the same, however, the protected party will adjust per the name of the policy (the lender is protected under a lender’s policy; a homeowner is protected under an owner’s policy).
A lender’s title insurance policy will protect only the lender against any potential losses if the seller is not legally able to transfer title rights. The lender is covered for the amount of your mortgage. So, for example, if you were to be caught up with back taxes from the previous homeowner(s) and aren’t insured with an owner’s policy, you won’t be protected under a lender’s policy.
Do I really need it?
Yes! The potential losses without a title insurance policy are often too great of a risk for a lender to take on, so a lender’s policy is almost always required. An owner’s policy, however, is optional. Once you purchase the property though, if there happens to be unpaid taxes, outstanding liens, or code violation fines, the financial burden will fall solely upon you as the homeowner. And, if you’re unable to cover the cost of these expenses, you may have to forfeit your home to collection — all because of something that happened in the past out of your control. Like the baggage that could happen in a relationship before you met your significant other but sometimes comes along anyways, yuck!
If you do opt for a policy, like most homeowners, then you are protected for as long as you own your property. (Sorry, there’s no relationship insurance equivalent for that protection.)
What is a title search?
A title search is a customary part of a home purchase and included in the cost of your title insurance policy. The search is a detailed review of public historical records, like deeds, court judgements, mortgages, wills, divorce decrees, tax records, and maps. Reviewing these documents will discover if there’s any title issues with the property you’d like to buy. But, they’ll also give you peace of mind that the property is free and clear for you to own without these related issues. So, what happens if the title search doesn’t show the property is free and clear? These are called “title defects.”
What are title defects?
If your home transaction is complete and an unforeseen title claim comes your way, your title insurance company will defend your title in court. They’ll also pay any settlement owed to clear the title, so long as the title defect is covered in your policy.
Common title defects include:
- Property liens
- Incorrect deeds
- Property encroachments
- Property access issues
- Unpaid taxes
- Unknown or missing property heir
How much does it cost?
The truest answer is: It depends. What plays into the varying price of title insurance will depend on your insurance provider and your state. Policies often come in under $3,500 and can be as little as $500. You have options, though.
You could negotiate for the seller to pay for your owner’s policy, factor it into the sale of the home via escrow, or pay it at the closing table. Remember that title insurance is a one-time fee when you’re taking options into consideration.
The bottom line
Taking out a title insurance policy is a smart move to protect your rightful claim to your property. When you’re buying title insurance, make sure to:
- Hire licensed title insurance professionals
- Compare premiums, and settlement fees
- Check the effective date of the policy
If you’re ready to start looking for a new home, you can get a title company recommendation from your real estate agent, broker, or lender. There’s a lot of information to consider during this process, but Homespire can help.
This is not an offer for a loan or any type of extension. Eligibility for a loan or extension of credit from Homespire Mortgage Corporation is subject to completion of a loan application, credit, income, and employment qualification, and meeting established underwriting criteria. Rates are subject to change without notice based on market conditions. See Loan Consultant for information on program income limits, buyer contribution, area median income, debt requirements, and other application details.