If you have ever purchased real estate, then you have probably heard of a title insurance policy. Can you imagine buying a house only to find out years later that you do not have clear title to the property? This could be due to a number of reasons like improper execution of documents or missed tax liens. Whatever the reason, this could be quite devastating and result in a big financial loss if you did not own the property free and clear. A title insurance policy can help protect both you and your lender (if you have a mortgage) from title defects. So, what exactly is a title policy and what does it protect against? We will tell you everything that you need to know about them, so just keep reading.
What Is Title Insurance?
Many people wonder, “How does title insurance work?” Title insurance is a type of insurance coverage that protects either a lender or homebuyer from financial loss resulting from a defect in the title to the property. Basically, this insurance policy protects against title issues from any previous acts. When purchasing title insurance, you pay only one single title insurance premium. This protects you from all prior acts that may have encumbered the title. These acts could have been committed by the prior owner or perhaps even many years and several owners ago.
When purchasing a title insurance policy, the title insurance company will conduct a title search. What this means is that a title agent with the insurance company will research the title to the property to identify any potential title problems. They attempt to ensure that your ownership of the property is not affected by any potential title problems. When buying real property, you want to ensure that you have total ownership rights in that property. If a previous owner were to come forward and claim ownership rights, then you might end up in a legal battle at the least. At the worst, you might lose the property that you thought you had purchased. When you purchase title insurance, it helps to ensure there are no issues with ownership of the property, and it protects you from financial loss in the event that any issues pop up in the future.
Types Of Title Insurance Policies
Believe it or not, there is more than one type of title insurance policy. While the two different kinds function much the same way, the protection they offer is different. Whether or not you have a mortgage on your home affects which type you need to purchase. Let’s dive into the two different kinds of policies.
Lender’s Title Insurance
If you are using a mortgage loan company to purchase your new home, then you will need to purchase a lender’s policy. In fact, almost every mortgage lender out there has a loan policy that requires that you purchase a lender’s policy when purchasing your home. Otherwise, their underwriters will not approve the closing of your loan. This even applies when refinancing a loan, and it applies regardless of your debt to assets ratio. This protects their financial interest in the property. Not only does it provide coverage to protect them against financial loss from prior title defects, but it also ensures that the lender has a valid and enforceable lien on the property after the purchase. This type of policy provides no coverage for the borrower.
Homeowner’s Title Insurance
It is a good idea to purchase an owner’s title insurance policy whether or not you were required to purchase a lender’s title insurance policy. In many real estate transactions, the seller will purchase an owner’s policy for the buyer and pay for it as part of their closing costs. If any prior acts or title defects result in a financial loss to the owner, then you may file a claim against the policy and get reimbursed up to the coverage amount of the policy.
What Does Title Insurance Cover?
So, exactly what does title insurance do? What could even go wrong with ownership of property? While the title agent will thoroughly search the public records to identify any potential issues, some issues may not arise until years after they have taken place. Here are some of the most common issues that are covered by title insurance. First, most policies cover situations where easements or encumbrances affect the property. These easements may not have been properly recorded previously, and the new owner might not know about them until years down the road.
Next, most policies will cover old tax liens or other judgments against the property. Perhaps there are unpaid taxes on the property, and a lien was filed against the property. Your title insurer will usually cover the cost of these back property taxes. In most cases, the policy amount can go up to the purchase price of your home. Finally, most policies will cover illegal deeds – even fraudulent documents. They will also cover missing or unknown heirs to the property from prior owners. Perhaps the heirs were not properly identified when the property went through probate. This is not an exhaustive list, so you should always refer to your insurance agent or real estate agent to determine exactly what is covered by your specific policy.
So, what does title insurance not cover? Typically, your policy will not cover against any acts that take place after issuance of the policy. Most policies only cover prior acts that took place before the policy was issued. In addition, they generally do not cover any issues that arise as a result of you not paying your mortgage. Again, check your specific policy for coverage details.
Cost Of Title Insurance
Title insurance cost varies based on a few different factors. First, the purchase price of the property is a big factor in the cost of your policy. The higher the property value and purchase price, the more the policy is going to cost you. Next, the state in which you live can have an effect on the price of your one-time premium. Remember that you only pay one single premium when purchasing this type of policy. On average, a lender’s policy will cost you around $600. An owner’s policy will set you back just a little more – on average, an owner’s policy will cost about $900.
The Bottom Line
If you are purchasing property, then you will definitely want to buy title insurance. These policies help to protect your financial interest in ownership of a property. These policies help protect against title defects like unknown liens, missing heirs, or unrecorded easements. In some cases, the seller might provide a warranty for the title, but your mortgage company will require a lender’s policy. This even applies when you refinance your home because the original lender policy is only good for the life of the loan. The cost of a policy is quite small compared to the amount of money that you spend on a home, so make sure that you purchase one to protect yourself.
Frequently Asked Questions
Do you really need title insurance?
Yes! You absolutely need to purchase title insurance when you buy property. If you are using a lender, then they will almost always require you to purchase a lender’s policy. However, you should go ahead and make sure that you have an owner’s policy as well. You never know what kinds of issues might pop up that could encumber your ownership of the property, so these policies can protect you in the event that surprises happen in the future.
What is the difference between title insurance and homeowners insurance?
Many people ask, “What is title insurance for a house?” They might think it is the same as homeowners insurance, but it is not. Title insurance protects your financial interest in the ownership of the property from title defects while homeowners insurance protects your property from physical damage or accidents. For example, a homeowners policy would protect you in the event that your home was damaged in a storm. On the other hand, a title policy would protect you in the event that someone claims they are the heir of a previous owner and they rightfully own the property.
What are the risks of not having title insurance?
If you do not have title insurance, then you could suffer severe financial consequences. Suppose that someone else comes forward and claims they own the property. You might be forced to go through a legal battle and pay for all the legal fees. Worse yet, the court might decide the other person rightfully owns the property. Without a title policy, you have likely lost the entire purchase price that you paid for the property. With a policy, your insurance company would cover this title defect and you could file a claim with the insurance company for the purchase price to recoup the money you lost.
