Buying a new home is an exciting experience, but it can also be a stressful one. Along the way, you might find yourself faced with several new terms and expressions. Title insurance is one of those mysterious real estate terms that will likely crop up when looking at closing costs.
While you’ve perhaps never heard of it before, this is something that needs to be taken seriously. Neglecting to take out title insurance can be a costly mistake that could even see you losing your home and all the money you’ve put into it.
Fortunately, we’ll take a deep dive into what title insurance is, how it works, what it covers, and why you’d be wise to take out a policy.
Title and Title Insurance
To understand what title insurance is, we must first examine what “title” means. “Title” is a legal term that refers to the legal right to own, use and modify a property. The title basically describes who is the ultimate holder of the property.
When you buy a home, the seller signs the deed, which is essentially a transfer document, over to you. With the deed in your name, you now have the legal right to claim the property or land in question. The title is then registered in your name in the government’s land registry system.
Title insurance is designed to protect the lender or buyer from claims, damages and financial losses arising from issues regarding the title of the property just bought. Such cases can range from unpaid liens on the house to conflicting wills and instances in which a fraudulent seller had no legal right to sell you the home.
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Often, such problems don’t arise until years after buying the home. A typical example is if a “long-lost” heir returns to the country after being away for many years, they may find they have the right to inherit the house you bought. This can result in a long and costly legal battle to determine whose claim is stronger. Plenty of other issues can also arise, as we’ll see below.
Title insurance protects the lender and/or the owner, covering legal costs and paying compensation if the property is forfeited. It’s a one-time cost that provides cover indefinitely. So, even if you sell the house and no longer hold the title, you’ll still be protected if something comes up.
Two Types of Title Insurance
You’re likely to come across two types of title insurance when buying a home: owners title insurance and lenders title insurance. The latter is generally required by mortgage lenders when you take out a loan to purchase your home. However, it’s not normally optional since it protects the lender’s stake in your home.
Meanwhile, owners title insurance isn’t usually required when you take out a loan. However, it’s recommended that you take out a policy since it protects you, the homeowner, against any claims. So even if you buy your home outright, you’re advised to take out a title insurance policy.
What Does Title Insurance Cover?
A title insurance policy covers you against the most common issues that can arise around title disputes, such as:
- Unpaid and unreported liens on your home (often from contractor bills or unpaid HELOCs)
- Forged title documents and deeds
- Conflicting and inconsistent wills
- Unknown heirs claiming ownership of the estate
- Public record mistakes and errors
- Pre-existing title defects (that occurred before your policy started)
While title claims are relatively rare, the risk is real, and several scenarios can arise. If you’re unlucky enough to find yourself tackling a title claim, legal fees can end up being tens of thousands of dollars. With title insurance, you won’t have to worry about that.
However, having title insurance is no guarantee that you’ll be able to keep your house if the ownership is disputed. For example, if you were sold the home illegally by someone who had no right to sell it, the actual owners will generally get their home back. But, if you do lose the property, you will at least be compensated if you have taken out owners title insurance.
Do I Need a Home Title Insurance Policy?
When buying a home, you’re often advised to conduct a “title search” before finalizing the sale. Indeed, many lenders will insist on it. A title search is a necessary process and is always worth doing. The best way is to hire a third-party title company. Title companies browse public records to discover whether there are any liens or outstanding payments on the property and check for limitations and rights on the land that other entities might have.
So, having carried out a thorough check on the title, you might think there’s no point in taking out title insurance. However, even the most comprehensive title search might miss something due to human error when creating the public record. Or, you may have fallen victim to a scam in which the “seller” has stolen the real owner’s identity to sell their home and take the money.
As such, it’s still well worth taking out title insurance. And unlike most insurance policies that only cover you for future events, title insurance policies cover all title-related events that have already happened. Finally, if you’re purchasing a “troubled property,” such as a foreclosure, remember that they tend to carry a higher risk of title claims.
How Much Does Title Insurance Cost?
So, how much is title insurance? Prices differ across the U.S. and Canada, but wherever you are, title insurance is a one-time cost that can often be passed on to your heirs and other beneficiaries (children, divorced spouse, etc.). And, for the protection it offers, the cost is usually fairly inexpensive.
In Canada, title insurance premiums are typically between $250 and $400 CAD and vary based on your home’s value and the insurance company you choose.
In the U.S., the cost differs across the country, generally ranging from $500 to $1,500 for the mandatory lenders title insurance. Here as well, it’s usually calculated based on factors such as location and the value of your mortgage. The owners title insurance is a little more expensive, typically between $700 and $3,500 in the U.S. For the most part, it’s good to shop around for the best price and coverage. However, in some states, such as Florida and Texas, all title insurance companies must offer the same coverage for the same fee.
Who Pays for Title Insurance?
Nine times out of ten, the buyer must pay for title insurance, which is usually added to your closing costs. However, like other closing costs, it can be used as a bargaining chip during negotiations. Sometimes, you can convince the seller to cover or split the cost as a sweetener.