What Is Title Insurance and What Does it Protect You From?
A clear title is essential for any real estate transaction. Title insurance is an important protection for home purchasers. More homeowners are electing to purchase title insurance, and you too should understand the importance and fundamentals of title insurance for your home purchase.
What is Title Insurance?
Title insurance refers to a type of indemnity insurance that protects you against losses in case of defects in the title to property that may remain hidden despite a thorough search of public records. These defects can include outstanding lawsuits and liens. Lenders' Title insurance policies also protect the interest of your mortgage lender.
Title insurance policies are subject to specific terms, conditions, and exclusions. There are two types of owners' title insurance – standard and extended title insurance policies. A standard title insurance policy has limited coverage encompassing off-records risks such as title fraud, recorded tax assessments, and other property defects uncovered by a public records search. It is cheaper than an extended title insurance policy.
An extended title insurance policy offers broader coverage encompassing everything the standard version covers plus off-record risks discoverable through property inspection or inquiries made to the actual property owners. It also covers defects, including unrecorded contracts of sale or leases.
What Type of Protection Does Title Insurance Provide?
Title companies have to conduct a thorough search on each title to look for liens or claims of any type against said titles before they can be issued. The title search involves checking public records to ascertain and confirm who legally owns a property. It also helps determine if there are claims on the property. Construction code violations that weren’t resolved and erroneous surveys are examples that can blemish a title.
A title insurance policy protects homebuyers and lenders against loss from encumbrances, defects, or liens against the title. Claims filed against titles include back taxes, conflicting wills, and liens (home equity, mortgages, easements). Owner's title insurance policies generally cover hazards including flawed records, another party owning the property, wrong signatures on official documents, fraud, prohibitive covenants (terms which impact enjoyment or value, like unrecorded easements), as well as encumbrances and judgments.
Two broad categories of title insurance exist – Owner's title insurance and lender's title insurance. Nearly all lenders need borrowers to buy lenders' title insurance to protect their interest if the seller cannot transfer ownership legally. An issued title insurance policy indicates that an extensive title search was conducted, thus offering you some assurance as a home buyer.
Errors or omissions can always occur during title searches, and you retain some financial risk. Owner's title insurance offers additional protection. This type of title insurance is optional, and the seller customarily buys it to protect you against title defects.
Not having an owner's title insurance policy exposes you to significant financial risk in case of a title defect. Let's say you are searching for your dream home, and after closing, you discover that the previous owner had pending property taxes. Without title insurance, the burden of the claim for back taxes will solely rest with you. You will have to pay the pending property taxes or risk losing your property.
The owner's title insurance protects you so long as you own the property. Likewise, a lender's title insurance policies protect mortgage lenders and banks from access rights that were recorded, liens, and other title defects. If the borrower defaults, the lender has access to coverage equivalent to the mortgage amount if the property's title has issues.
The Cost and Payment of Title Insurance
The title insurance cost varies significantly. Factors that determine title insurance cost include the location of the property, the property's purchase price, and the type of coverage (standard or extended).
The bulk of your title insurance premium covers research to ascertain the legal ownership of the property you want to purchase and determine if there are judgments and unpaid tax liens recorded against the property.
You pay the title insurance premium close to escrow, and it is a one-time payment, provided you keep your original mortgage. If you refinance your mortgage, you must purchase a new lender's title insurance policy. This protects the lender against title risks that may have been recorded against the property from the date of issue of the precious policy to the mortgage refinance date.
If you refinance your mortgage, you may qualify for a refinance rate on your new title insurance policy. Many title companies often offer significant premiums reductions for policies issued within a five-year period.
Local custom and practice determine the party that pays for title insurance. Usually, the seller pays for title insurance, but in some states, you, as the home buyer, pay for it according to customs. In other areas, you split the cost halfway between you and the seller. Nonetheless, the title insurance payment is a negotiable aspect.
Overall, purchasers and lenders require title insurance to be protected against the various possible title defects. As a real estate investor, you have to ensure that a property doesn't have a bad title before proceeding with a purchase. Homes in foreclosure, for instance, can have several outstanding issues. Conventional insurance policies protect you against future losses. Title insurance is different as it protects you against claims for past occurrences.
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