When you buy a home, you “take title” to the land. What this means is you are establishing legal ownership that is confirmed by public land records. Over half of all Real Estate transactions end up with title-related issues whether they be minor or disastrous.
The difference between title insurance and regular insurance is that title insurance protects you from events that may have happened in the past, whereas regular insurance protects you from events that may occur in the future. Here, we provide a breakdown of what exactly title insurance is and why it is so important.
The glossary
These terms are the foundation of title insurance:
- Title: A title is the document that proves an individual legally owns a property.
- Escrow: Escrow is the period of time where a third party (such as a title company) holds the funds for the home sale until the transaction is ready to be completed.
- Title search: During escrow, the title search is conducted to find mishaps in past titles for the property.
- Lien: If an individual owes money to someone else, that person (the lienholder) can become the owner of the debtor’s property until the debt is paid.
Owner’s vs. lender’s insurance
The two types of title insurance are lender’s and owner’s insurance. Lender’s insurance protects who is issuing the mortgage loan. The cost of this type of policy is usually a percentage of the loan amount. The more payments you make on your loan, the smaller this number becomes. Once you pay off the loan, the policy will end.
The owner’s insurance protects the homebuyer from any title-related issues that may arise before, during, and after a title search. This policy price is based on a percentage of the home’s sticker price, unlike the lender’s insurance. There is usually a onetime title insurance fee during the time of closing and this policy lasts as long as you own the home.
Is it mandatory?
If you are trying to find a lender without having lender’s insurance – good luck. It is almost always required in order to receive a loan. However, the owner’s insurance is optional. Now just because it is optional does not mean it isn’t necessary.
The lender’s policy only covers their investment, but this does not include the homes total value. In order to protect the total cost of your investment, it is vital to purchase an owner’s policy. Your security in your home is priceless.
Policy purchase and coverage 101
First and foremost, a title search is conducted to find any errors or issues with the title. If any problems arise, it is the seller’s responsibility to fix them.
After the search is conducted and any problems have been solved, your insurance policy will be issued to you. What does this policy cover exactly?
- Fraudulent sellers
- Forged documents
- Unknown heirs
- Certain problems missed during a title search
- Improperly filed documents
Just to name a few. However, also be aware that a standard policy will not cover everything. You will need to purchase extended coverage to cover issues like zoning problems and post-policy claims.
Common mistakes
You do not have to buy title insurance from the company that your agent or lender recommends. Feel free to shop around and always do your research to find the right fit for you!
As mentioned previously, title insurance does not cover events that may occur in the future. If an undisclosed heir to your property comes forward after signing the policy and files a lawsuit, your policy will not cover you. However, if there was a lawsuit filed prior to signing the policy, and the title search missed it, then your policy is able to cover you.
Avoid all of the stress and worry and be sure to look into your title insurance options.
