Often, the purchase of a house is one of the most significant investments you’ll make in your lifetime. Disputes over the property can be a nightmare, especially if someone else claims legal ownership after you’ve already paid in full. This can be a long, stressful, expensive, and time-consuming process. Title insurance is designed to help mitigate these risks. In this article, we will provide you with all the information you need to know about title insurance.
Content Recap:
What is Title Insurance? Title Insurance 101
But before we delve into the main topic, here is a helpful video that explains title insurance in more detail.
So, what exactly is title insurance? In this context, the title refers to the evidence of lawful ownership or possession of property. Title insurance protects various parties, including real estate owners, lenders, homebuyers, and related agents, from losses, damages, or loss of property due to problems with the property’s title. Depending on the policy, title insurance companies will pay for specified legal damages resulting from disputes that occur after the sale. As a potential buyer, it’s crucial to ensure that the title is clear and free from ownership claims to avoid future costs.
One key difference between title insurance and other types of insurance is the events they protect against. While other insurance policies cover you for unforeseen future circumstances, title insurance protects you from past issues. In some cases, instead of title insurance, you can obtain a warranty of title from the buyer during private transactions. This document guarantees that the seller has the right to transfer ownership and that no one else owns the property.
How Does Title Insurance Work?
So, how does title insurance work? Having a clear title is essential in real estate transactions. Title companies typically conduct a title search to ensure there are no liens or claims before issuing title insurance. A title search confirms the legal ownership of a property by examining public records for any claims. In simple terms, it ensures that the seller owns the property or has the right to sell it. If the title search comes back clear, the company will proceed with the underwriting process. They assess potential issues such as unresolved building code violations or erroneous surveys. They also search for undiscovered issues and provide a quote based on the associated risks. If there are too many challenges with the title, title companies may refuse to provide a policy.
Some commonly filed claims against titles include easements, mortgage or loan liens, back taxes, and home equity lines of credit (HELOC). Title insurance protects against events such as another party owning the property, forgery or fraud on documents, encumbrances like liens or outstanding lawsuits, problematic records, encroachments, and unrecorded easements, and other restrictive agreements that affect the value of the property.
Types of Title Insurance
Two types of title insurance exist to protect all pivotal participants in a real estate deal. These two types are owner’s title insurance and lender’s title insurance.
Lender’s Title Insurance
A lender’s policy is liability protection for lenders, especially on mortgages. If claims come up during the duration of the mortgage, this policy protects them.
Lender’s insurance typically lasts the length of a mortgage. Lenders require a borrower to get it to protect them from loss.
Owner’s Title Insurance
An owner’s title insurance isn’t compulsory, but it is an excellent idea. It protects you as a homebuyer.
To err on the side of caution, even if you get a warranty deed from the seller, the policy can still help. A warranty deed confirms that the title is clear, but the policy enables you to cover the costs in case of an issue.
Title searches are not bulletproof, so a bit of extra help is always welcome.
What is the Coverage of Title Insurance?
Title insurance helps you get Insurance’s Importance in Financial Planning. The classic premium of title insurance is for comprehensive coverage.
The comprehensive coverage includes the homeowner’s title insurance policy and the lender’s policy. The lender’s policy is just as we discussed above in the types of title insurance.
However, the homeowner’s policy included more than what is mentioned above. Here are some coverages of a homeowner’s policy.
Coverage for Building Permit Violation
This coverage allows the policyholder to remove structures that the previous owner built without the necessary permits.
Boundary walls and fences are excluded from this policy. It covers up to $25,000 after a deductible.
Address Coverage
It helps to ensure that the property address and the address on the insurance document are the same.
Zoning Coverage
If a policyholder needs to remove or fix an improvement for violating zoning laws by force, they will be covered by zoning coverage.
Restrictive Covenant Violation
Sometimes, someone may make an effort to force a restrictive contract on you because of a violation before the policy date. This coverage helps to protect you from losing your title when such events occur.
Post-policy Coverage
This one simply protects you from ownership claims after the policy.
Supplemental Taxes
It protects you from supplemental taxes for previous construction, ownership change, or change of use.
Trust Coverage
It extends the protection of the policy to feature a trust that you create.
Subdivision Coverage
Subdivision coverage is for land that wasn’t correctly divided before purchase that limits the policyholder from:
- Closing sales
- Getting a building permit
- Getting a loan
Subdivision coverage covers up to $10,000 after deductibles are removed.
Encroachment Coverage
It protects you from people building structures that encroach on your insured land. If they are building boundaries like walls or fences, however, it does not count.
Coverage for Structure Damage Due to Resource Extraction
It protects existing structures and future improvements on your landscape. It also covers damage caused by other people using the land to extract and develop water, minerals, and other substances.
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The Value of Title Insurance
Title insurance is a little-known but extremely valuable insurance type. People who are familiar with land and housing disputes are better equipped to tell you how strenuous it gets.
Dealing with such a terrible card as real estate disputes without insurance isn’t an ideal situation. Here are three reasons why title insurance is extremely valuable.
- It helps in protecting its policyholders from numerous unknowns.
- It offers a beneficial protection type at an excellent rate.
- It is beneficial for the United States as a whole, not only as an individual.
The Cost of Title Insurance
Title insurance has a one-time premium. The average is between 0.5% and 1% of the home’s total value.
Some states do not regulate title insurance, so the price may vary. The premium payment is typically required at closing.
Is Title Insurance For You? How to Know If You Need Title Insurance
Mortgage lenders usually require title insurance from homebuyers. However, they only demand this for their protection (lender’s title insurance).
If you want to protect yourself from the responsibility for title issues, you will need to get a separate policy for yourself.
That being said, title insurance policies are for homebuyers and mortgage loaners. So if you are in this category, you should get a title insurance policy.
Sometimes, title searches may come up clean because of unrecorded data, so they have a limit. Except you don’t mind paying all the bills for future title claims, we advise that you get title insurance.
What Risks Come with Not Having Title Insurance?
The absence of title insurance puts transacting parties at risk in case a title defect occurs. After closing a deal for your dream house, you can stumble on issues that you will pay for from your pocket without title insurance.
Some of these risks are:
- Back taxes
- Unrecorded liens
- Unrecorded access rights
- Other defects
Title Insurance Shopping
It is common to get recommendations for title insurance companies from your title search company, mortgage lender, or real estate agent. However, you can shop around because it’s not compulsory to follow them.
Every company offers different rates, so you will do your best to find the ones that work better for you. Things you should consider while shopping includes:
- A reputable company
- Stability since your home will be around for a long time
- Willingness to answer all your questions before and after purchase
Making the Final Purchase
After completing the purchase agreement, the insurance process will be initiated by a closing agent or escrow. The four major title insurance underwriters in the United States are Fidelity National Financial, Stewart Title Guaranty Company, First American Title Insurance Company, and Old Republic National Title Insurance Company. It’s important to note that sellers cannot demand that you get your insurance from a particular carrier, thanks to the Real Estate Settlement Procedures Act (RESPA) that prevents abuse.
In conclusion, title insurance provides valuable protection for homeowners and mortgage lenders. It mitigates the risks associated with property disputes and unknown title defects. It is a one-time premium, usually a percentage of the home’s total value. Without title insurance, you are exposed to potential financial burdens and liabilities. Shopping around for the best rates and considering the reputation and stability of insurance companies will ensure you make an informed decision.