Understanding Title Insurance and Why You Need It
You probably have a lot of things on your mind when you’re buying a home – and title insurance may not be one of them. It’s one of the fees that appear on your closing documents, but you may not even realize its purpose. That’s OK – I’ll break down the top five things you should know about title insurance to get you started.
Title insurance explained
Like other forms of insurance, title insurance is something that protects you from facing a financial loss – in this case, related to property ownership. It operates two-fold, in that it secures that the property you’re buying will be legally transferred to you from the previous owner, and it protects you from any future title defects that may arise (which I’ll cover below). Title insurance does differ from other types of insurance in that there is no monthly premium. Instead, you’ll pay a one-time fee at closing. Even though it’s a single payment, it protects the insured from title defects for the life of the loan.
Why is it important?
During the home buying process, a title research company will review the ownership history of the home to ensure there are no title defects. Essentially, the company is confirming the home has a clear title, meaning the owner who is selling you the home has total ownership of the property and no liens or levies against it. However, there’s a possibility that an issue could arise years later due to improperly recorded documents, mistakes in ownership history, legal matters or another scenario that occurred prior to you buying the home.
Do I need to purchase title insurance?
There are actually two types of title insurance you should be aware of – one that protects the owner and one that protects the lender in the event of a title defect.
Lender Policy
Your lender will require you to purchase the lender’s policy to cover potential legal defense costs and mortgage reimbursement for any payments you’re unable to make in the event your home is lost to someone else’s claim on it.
Owner Policy
This policy is solely for your own benefit, to cover you in the event you face legal fees or other losses due to title defects. While your lender may not require you to have an owner’s policy, having one is a good idea in order to protect your assets.
As unlikely as it is that your home will have a title defect, ensuring you have this protection in place will keep you and your lender’s financial interests safe.
What happens if I opt out?
Generally speaking, all types of insurance are in place to protect you from financial or property loss. Though you may never really need to use it, having title insurance prevents you from taking on a big risk when you purchase your home. For example, here are several scenarios where title insurance can protect you:
The seller may have co-purchased the home years ago and now needs the other property owner’s signature in order to finalize the home sale.
The seller may have inherited the home under the terms of an outdated will and it turns out there is actually a more recent one that left the home to another person – meaning the seller isn’t the true owner.
If a lien was filed against the home, it’s possible for debtors to legally claim the right to be paid from proceeds of the property’s sale in order to settle debts.
Opting out of owner’s title insurance means you’ll take a loss on your down payment and principal payments already made – and risk losing the home – if it is determined that someone else is the true owner due to a title defect.
How much does it cost?
As mentioned above, title insurance for an owner policy is a one-time fee, and unlike other forms of insurance, you won’t have a monthly premium. It is purchased at closing, but determining who pays – the buyer or the seller – depends on the trend in your local area.
You always have the option to purchase title insurance from the company of your choice if you’re paying.
However, if your lender has a preferred company, you’ll typically find it cheaper to simply tack your owner’s policy on to the lender’s policy. Also, prices are regulated in many states, so fortunately, you shouldn’t find huge discrepancies between title insurance companies.
Buying a home is one of the biggest financial transactions you’ll make. That’s why it’s so important to understand the steps involved in the home buying process, so you can make educated decisions and protect your assets.