When you’re buying a home, it can seem as if the list of closing costs and fees is almost endless. Many of these fees are things you’ve never heard of before, and many more of them can remain a mystery to you if you’re not careful. In real estate, knowledge is power, and it’s best to be informed as much as possible. Here’s what the title insurance is and how it works.
What is title insurance exactly?
Title insurance is a one-time payment that is designed to protect either the lender or a buyer from claims that might arise in relation to the title of the property you’ve just bought. When you buy property, you’re actually buying the title, i.e. your right to possess and use the property/land in question. How your new home is titled can vary and depends on how you decide to buy your house, and with whom. You may choose to buy the house with a friend or spouse as tenants in common, or joint tenants, for example. Different titles can impact how the property is treated, with the right of survivorship coming into play in some cases.
Problems regarding the title of a property can arise months or even years after you bought your home. For example, if someone returns to the country after a long absence, to find that they have the right to inherit the house you bought, you may face a lengthy and costly legal battle. There are a great many other potential issues that could arise as well. What title insurance does is protect either the lender or the buyer, and covers their legal costs, and may pay out full compensation if the property must be forfeited.
Why do I need title insurance?
You might be thinking that you can avoid such problems by carrying out a title search. Indeed, many lenders will require you to have a title search on the property you want to buy. Carrying out a title search is important, and is normally done by a third party who will browse public records. It’s a good way to see any limitations on the use of the property, any rights on the land that other people or entities have, as well as any liens or outstanding payments.
So, if you already know about the title, and have had the chance to rectify any issues in advance, why would you bother with title insurance? Unlike most insurance policies that cover you for future events, the title insurance covers you for all title related events that have already happened. The biggest reason for taking out title insurance is the fact that even the most thorough title search can miss something.
Many public records are kept by humans, and we all know that human error is not uncommon. Mistakes in indexing, recording legal documents, or errors/omissions when transcribing things like similar names can all come back to bite you years down the line. In addition to human error, fraudulent activities from previous owners or con artists, such as forged documents and identity theft, can also cause you trouble as the new owner, despite your innocence.
What title insurance covers
Now that you know what title problems can arise despite carrying out a title search, it’s important to know what a typical title insurance policy covers. For the most part, you will be covered for the following points:
- Unreported liens (typically from unpaid HELOCs or contractor bills) or undocumented easements on your new home
- Public record errors and mistakes made when filing documents
- Forged title documents and forged transfers of ownership rights
- Pre-existing title defects that occurred prior to the start of your policy
- Unknown heirs to the estate claiming ownership
- Inconsistent or conflicting wills
Title insurance claims are relatively rare; however, numerous scenarios can, and do, arise now and then. If this happens to you — no matter how unlikely it might seem — title insurance can save you thousands of dollars in legal fees. Be aware that if you’re buying a ‘troubled property’, such as a foreclosure or a short sale, the risk increases considerably.
The different types of title insurance
There are 2 types of title insurance that you’re likely to come across; ‘lender’s title insurance’ and ‘owner’s title insurance’. Lender’s insurance is required by most mortgage lenders, as it protects their stake in your home. Owner’s insurance generally isn’t required, but is recommended as it protects you as the homeowner against any claims against your ownership of the property.
How much does it cost and who pays?
Title insurance is a one-time cost that will offer coverage indefinitely, even after you’ve sold the house in question. The cost of title insurance varies across the country, but for the most part, you can expect to pay between $500 and $1,500 for the mandatory lender’s title insurance. The cost is typically calculated based on factors such as the value of your mortgage and your location/state. This fee is generally added to your closing costs, and it’s the buyer’s responsibility to pay for it.
Owner’s title insurance is generally more expensive, typically ranging from $700 to $3,500. Again, numerous factors contribute to this fee, such as location, credit score, loan amount, and down payment amount. Often, you can negotiate this fee with the seller, who may agree to pay for it in full or split the cost as a sweetener.
It’s a good idea to shop around for title insurance, as you might find that policies and coverage differs, with some insurers offering better prices than others. In some states, however, such as Florida and Texas, all title companies must provide the same level of coverage for the same fee.
Title insurance is one closing cost you might not have heard of before and one you might be eager to skip if possible. However, there are several good reasons not to neglect it, and it might save you thousands of dollars in the long run.