Everything You Need to Know About Title Insurance
If you’re in the process of buying a new property, you may have come across mention of title insurance. This product is a mandatory part of the buying process with most lenders — but what exactly is it and what does it cover?
What is Title Insurance?
Anytime you purchase a new home, land, or even a commercial building, a title is involved. This document will be transferred from seller to buyer, and is proof of ownership of the property in question.
In order to sell a property and transfer the title, though, it needs to be free from defect. This means that you cannot sell a property that does not belong to you, one with liens or judgments against it, one with issues related to easements or access, or one that has flawed records.
Prior to closing, the title company will work diligently to research the property to ensure that none of these issues exist. They may comb through centuries’ worth of records in the process, so they can say with confidence that the property you are purchasing is free and clear and able to be transferred.
Of course, this search isn’t always perfect.
There are instances where title issues are missed until it’s too late. These could be the result of spousal or inheritance claims, judgments against the property, fraud or forgery, tax liens, incorrect records, unrecorded easements, and more. That is where a title insurance policy comes into play.
Who Title Insurance Protects
Title insurance is designed to protect the lender and/or the buyer from any disputes that may arise during or following the sale of a property and the transfer of its title. If any part of the title transfer is found to have a defect after the fact, title insurance will kick in to cover expenses involved, whether they are related to additional research or litigation.
There are two different types of title insurance that you should consider:
- Lender’s insurance
- Owner’s insurance
The former is required by most lenders, though the buyer is usually the one to foot the bill for the policy. As the name implies, lender’s title insurance will protect the lender in the case of title issues that threaten the property’s loan (and therefore, the lender’s investment).
Owner’s insurance, on the other hand, will protect the buyer from title concerns that threaten their stake in the property. Let’s say an issue were to arise years down the line, or someone were to claim ownership of the property; the lender’s policy would still protect the mortgage balance owed, but it wouldn’t protect you as the owner or any equity (including the original down payment) that you may have built up over the years. That’s where an owner’s policy would step in.
While only a lender’s policy is required at closing, it’s usually a very wise decision to also purchase an owner’s title insurance policy at the same time, just to be safe.
Who Pays for It
In the vast majority of cases, a buyer is responsible for covering the purchase of a lender’s title insurance policy. This coverage protects their chosen lender, and the total cost of the policy is added to the buyer’s overall closing costs.
In many cases, the buyer will be responsible for purchasing an owner’s policy. Buyers may also request that the seller purchase a title insurance policy on their behalf, as part of the property deal. If this is agreed, the buyer will most often purchase the policy themselves — along with the lender’s policy — and then be reimbursed by the seller at closing.
Why is Title Insurance Important?
A fair amount of research is involved in the title transfer process, to ensure that there are no disputes, such as those regarding the true ownership of the property. No matter how diligent the title company and its attorneys are, though, disputes may still arise.
In order for a sale and title transfer to be successful, said title needs to be considered clear. This means it needs to be free of:
- Back taxes
- Liens on the property
- Conflicting claims to the property (due to inheritance)
If any of these are present, the title search should find them ahead of time… at least, that’s the plan. However, if any of these situations are present but get missed prior to the closing of the sale, it could cause serious problems for the new owner in the future.
Why You Need Title Insurance
Let’s say you buy a home. You make an offer, which is accepted, and get approved for your mortgage loan. The sellers, who inherited the property from their late father, sign over the title on closing day. You walk away with the keys and live happily ever after in your dream home.
Except that six months later, the county comes knocking with a hefty, unpaid tax bill. Turns out that the original owner had been accumulating back taxes for years, and the county would very much like to collect on that debt from the owner of the home… you.
If you didn’t have title insurance, this debt would fall in your lap, even if the title company claimed that there were no tax liens on the property at closing. If you did pay for title insurance, though, the company will step in to protect your (and your lender’s) interests in the litigation that follows.
This could save you tens of thousands of dollars, or even be the difference between keeping and losing your dream home.
What If I Pay Cash — Do I Still Need Title Insurance?
If you buy a home or property in cash, you do not need to purchase a lender’s title policy, as you aren’t actually dealing with a lender. However, it may still be a wise idea to purchase an owner’s title policy.
While it’s unlikely that issues with your title will arise in the years to come, it can certainly happen. Whether you pay in cash or not, your investment and all stake in the property are at risk if you do not have an owner’s title policy. This coverage can protect you and cover expenses related to title defects, saving you and your family from hefty expenses and heartbreak.
When buying a home, there are so many added costs involved. You may be tempted to skip a few items in order to save a buck, but don’t let title insurance be one of them — this coverage could wind up protecting you from an error decades in the making.