When you are in the process of purchasing a property, the last thing you want to get in the way is a title dispute. In the event of such an occurrence, you may feel disadvantaged and unprotected against the losses. While title insurance may not be the first thing on your list when buying a house, it is crucial for safeguarding the interests of you and your lender when title issues arise. Find out what you need to know about a title insurance policy and the ways it can help a home buyer in this article.
What is title insurance?
In the simplest terms, a title is a legal document establishing ownership of a property. Whoever has the title to a property is considered the rightful owner. Each time that a property is sold, the title is transferred from owner-to-owner. When you close the mortgage for the house, the title will be transferred to you, and the lender will keep it until you have paid off the loan.
Title insurance is a policy that covers the borrower and the lender in case of title disputes. As a buyer, you are required to purchase title insurance to be able to go ahead with refinance and mortgage options. The cost of legal issues such as forged documents, ownership claims by others or errors in the title can be exorbitant and hurt your finances if you are not insured.
There are two types of title insurance policies, usually bundled as one by most companies: lender’s insurance and owner’s insurance.
Lender’s insurance is mandatory, and the buyer of the house (usually the borrower) pays for it during a refinance transaction. In some states, the seller pays for the title insurance. This policy, although lawfully required, protects only the lender from financial loss if any title dispute arises.
This is why it is highly recommended to also purchase an owner’s policy. It isn’t required by law, but as the buyer and owner of the property, you must ensure you are covered against potential disputes that might emerge after the deal has been closed. The owner’s policy does that for you.
What does title insurance cover?
During the process of ownership transfer of a property, an attorney or title company will perform a title search, which involves looking up legal documents and public records to determine the rightful owner and identify unpaid taxes, loans and cases of fraud, if any. Although a clean title is required for any real estate transaction, title searches are not always error-free, and both the lender and the borrower remain at risk without title insurance.
Unlike typical insurance policies, title insurance covers you against past issues rather than those that could arise in the future. When purchasing title insurance, the home buyer must pay close attention to the coverage options. If you are buying a bank-owned foreclosed property, the title insurance will be paid for by the seller.
However, this does not always mean that the title to any foreclosed property has been thoroughly investigated and cleared by the lender. If the foreclosure records are found inaccurate, the owner’s title insurance policy will defend your right to the title in a legal battle. When purchasing a foreclosed property, it is essential to find out if the policy offers foreclosure protections.
A title insurance policy protects you against:
- Forged title: forgery of legal documents is on the rise, from faking and altering signatures to using false names to having a non-authentic deed notarized. A title insurance policy covers you against financial loss due to fraudulent practices.
- Unpaid taxes: as a new homeowner, if you find yourself facing the daunting reality of unpaid taxes by the former owner, your owner’s title insurance policy should either cover your loss if you choose to pay the back taxes or defend your decision to not pay when the collectors come knocking.
- Filing errors: mistakes in public records can endanger your homeownership rights. The cost of resolving these errors is covered by a title insurance policy.
- Ownership claim by others: unknown or missing heirs named in a will may claim ownership even long after you purchase the property. In such a scenario, having title insurance is a lifesaver.
- Liens: there are two types of liens placed on a property by creditors: recorded and unrecorded. While recorded liens such as mortgages, bankruptcies, tax liens or mechanic’s liens are covered by a title company, unrecorded liens are not. Outstanding charges or unresolved fees from the city or unpaid utility bills are usually unrecorded liens but can be determined by performing a municipal lien search.
- Undocumented easements: despite being the owner of the property, your rights to enjoy and access it as you like may be forbidden by unknown and undocumented easements. Such authorization can allow anyone from a neighbor to a utility company to have access to the property that you own. If there are legal or financial hassles involved, a title company insures the owner against them.
How to get a title insurance policy?
In most states, title insurance can only be sold by licensed title insurance companies or agents. You can buy the policy either directly from the company, or from nan authorized agent that sells policies on behalf of that company. Once you put in the request for the policy, a title officer will examine public records to determine the eligibility and bring to light problems that may affect the title.
It is recommended that you do your research about title insurance at the same time as choosing a real estate agent once you have been prequalified for a loan. Some of the ways to find a title insurance company are:
- Asking the seller
- Asking for recommendations from your attorney, lender or bank
- Checking online resources
Don’t be pressured into buying from a company of your lender’s or real estate agent’s choice. If they suggest a certain insurer, ask if they are being paid for referrals. It is legally required that insurers disclose such business arrangements, if any exist. When shopping around for title companies, don’t just look for competitive prices. You should also determine if the company has a good reputation and efficient customer service.
In some instances, you may be eligible for certain discounts. For example, if the property had an earlier title insurance policy, some insurers provide a discount called a reissue rate. Bundling the lender’s and the owner’s policies may also get you a price cut.
When to get title insurance
What makes a title policy different from all other types of insurance is the fact that title insurance requires a one-time fee. There are no premiums, and the money is paid together with the closing costs of the house. For this reason, the lender’s policy must be purchased once you are approved for a loan.
However, the owner’s policy can be purchased after closing on the house, although this isn’t always the wisest move. If any title defect is found after closing the deal and before you buy the title insurance, you will be left unprotected against lawsuits and financial loss.
Frequently asked questions
How long does a title insurance policy last?
A lender’s policy lasts until the loan has been paid off, while an owner’s policy lasts as long as you (or your heirs) own the property.
What happens when the title is transferred?
If the title is transferred to someone not considered an insured party, you typically lose coverage. This largely depends on the type of policy, and for more information, you may speak to an attorney about coverage options.