When you get a mortgage, part of your closing costs will be title insurance. the premium is a one-time charge and the policy protects the lender. You can also purchase homeowner’s title insurance to protect yourself, but it’s not required.
Here’s what you need to know about title insurance: what it covers, how much it costs, and whether you should buy it.
what is title insurance?
Title insurance is a policy that covers third party claims on a property that do not appear in the initial title search and arise after the closing of a property. a third party is someone who is not the owner of the property, such as a construction company that was not paid for its work on a previous owner’s home. the term “title” refers to someone’s legal ownership of the property.
A title claim can arise at any time, even after you have owned the property without problems for many years. How could this happen? someone else may have property rights that you are not aware of when you make an offer to purchase a property. even the current owner might not know that someone else has a claim on the property. In the case of an overlooked heir, even the person who has those rights may not know that he has them.
Before your mortgage loan closes, your mortgage lender will order a title search from a title company. The title company searches public records related to your home to try to find title defects that may affect the property rights of the lender or buyer, such as:
- Liens may be placed on the property by a contractor, a taxing authority or a lender who has not received payment. you don’t want to be stuck paying unpaid bills from a previous owner.
- easements are someone else’s right to use your property even if you own it. For example, if there are utility lines in your backyard, the utility company will have an easement that allows them access to your property if they need to work on the lines. the easement could limit your ability to use your property however you want.
- Liens include liens (also called “financial liens”) as well as easements, but also include zoning laws, restrictive covenants imposed by homeowners’ associations, and tenant rights.
- property inspection errors
- boundary disputes
- property write errors
- building code violations by a previous owner
- conflicting wills
- claims from a former spouse who did not sign the sale
- forged documents
- Liens from prior contractors, taxing entities, or lenders
- incorrectly registered documents
A title company searches public records, including deeds, mortgages, divorce decrees, court orders, tax records, and child support orders.
If the title search reveals a problem (also called “clouds”), the title company will try to resolve it. In some cases, your real estate agent will need to work with the seller’s agent to get the seller to resolve the issue. in other cases, the issue may be significant enough to derail the sale.
what does title insurance cover?
A title insurance policy covers underlying problems with a property’s title that might have been lost before the home was purchased. Basically, it’s useful if the public records search by the holding company failed to uncover any liens or ownership disputes.
These are some of the problems an owner’s title policy can protect you against:
what does title insurance not cover?
That said, title insurance does not protect owners from all possible infringements of their property rights. For example, it doesn’t protect you against title problems caused by your own actions, such as not paying the company that replaced your roof or not paying your property taxes. It also does not protect against eminent domain, which is when a government seizes private property for an ostensibly public purpose.
In short, it does not protect against problems that are created after the property is purchased. protects against problems that could have affected your decision to buy the property if you had known about them at the time.
types of title insurance
There are two types of title insurance: lender’s title insurance (also called a loan policy) and owner’s title insurance.
A lender’s title insurance policy protects the financial interests of the company issuing the mortgage (just as mortgage insurance does). it ensures that the lender has the superior interest in the property over and above any other liens. You’ll need to buy title insurance from the lender every time he gets a mortgage, whether you’re buying a home or refinancing. A discount may be available when you’re refinancing if your loan is less than 10 years old, based on prairie title in oak park, illinois.
Major mortgage investors, Fannie Mae and Freddie Mac, who often buy home loans from lenders after closing, require that the lender’s title policy coverage be at least equal to the principal of the mortgage. As you pay down the principal on your mortgage, the lender’s coverage decreases accordingly.
A homeowner’s title insurance policy protects the homebuyer. For a homeowners policy, the amount of coverage is usually equal to the purchase price and remains constant as long as you or your heirs own the home. this type of policy is optional and only needs to be purchased once.
how title insurance works
An owner’s title insurance policy may cover the costs of settling a previously undiscovered lien or defending against a lawsuit brought against you by someone claiming title to the property. it can also provide a cash settlement to a new homeowner who inadvertently purchases a property with a forged deed from a fraudulent seller who did not actually own the home. Plus, owner’s title insurance protects your ability to sell the house one day if a problem arises during a later title search.
You’re probably less concerned with how a lender’s policy works, since it doesn’t protect you. but he may still be curious as he is being asked to pay for it.
Let’s say you lose your home because it turns out the property was sold to you fraudulently. you are not going to continue paying the mortgage. The lender will then file a claim with your title insurance company to recover the mortgage payments it expected to receive from you.
In other circumstances where you defaulted on your mortgage, the lender could foreclose and recoup its losses by selling the home. but if it turns out that someone else has a right to the house, foreclosure is not an option.
You can view the industry standard forms used for homeowners and lenders policies on the website of the American Title Association (Alta), a large national trade group for title agents.
cost of title insurance
Title insurance is a one-time upfront fee, not an ongoing expense. the owner’s policy is based on the purchase price of the home, while the lender’s policy is based on the amount of the loan. Both policies together typically cost between 0.5% and 1.0% of the home’s purchase price, or $1,500 to $3,000 on a $300,000 home, depending on registration.
In some states, the price of title insurance is the same regardless of which title insurance company you use. in others, you can save money by shopping.
You can get an estimate of the cost of title insurance in your area by using the Old Republic Rate Calculator and Fidelity National Rate Calculator. You can also get a quick quote from the First American Title Fee Calculator or the Stewart Fee Calculator. you may be able to get estimates for other closing services at the same time.
who pays for the title insurance?
Buyer pays lender’s title insurance policy as part of closing costs. either the buyer or the seller can pay for the owner’s policy on behalf of the buyer. local real estate custom often determines who pays. Buying an owner’s policy at the same time as a lender’s policy can lower the cost of the owner’s policy through what’s called a “simultaneous issuance charge.”
where to buy title insurance
As a homebuyer, it’s your choice which title insurance company to use. You can get recommendations from the seller or your real estate agent, but you may not want to accept their suggestions without doing your own research.
You can follow your lender’s recommendation because their financial interests in the property are aligned with yours. however, some lenders also have a financial interest in the title companies they recommend to borrowers.
That doesn’t mean you won’t get a competitive price if you follow the lender’s recommendation, but it does mean you may want to do some price shopping. According to the Consumer Financial Protection Bureau, you may be able to save up to $500 by shopping around.
To find a title insurance company, you can perform an online search of the high registry for companies in your state using the advanced search feature. You can also choose one of the major title insurers: Fidelity, First American, Old Republic, or Stewart. make sure the company’s reputation and financial strength ratings are verified.
Do I need title insurance?
Lender’s title insurance is required, but owner’s title insurance is optional. A homeowners policy can protect you against loss of your assets and your right to live in the home if a claim arises after purchase. Even if you are buying a new home, there may be defects because the land has had previous owners and the builder may not have paid all the contractors on it.
As with many other types of insurance, an owner’s title insurance policy can seem like a waste of money if you never need to use it. But it’s a small price to pay to protect your interests in case someone challenges your title after you close on your house.