When you're in the process of buying real estate, an attorney, lender or title company usually initiates a title search to check for issues with your new property's title that could complicate your ownership rights later on. However, while your new property's title might appear clear after the search, issues like disputes over ownership, encroachment and unpaid debts can arise after the closing of the real estate transaction and put your financial health and even ownership of the property at risk.
When you purchase title insurance it helps offset this risk for both you as the new owner and the mortgage lender, since title insurance covers title issues and offers financial protection during and even after you own the property. Use this guide to better understand how title insurance works, why you need title insurance as a borrower, the different types of title insurance and how you can obtain an owner's policy.
Read More: Buying a Home: The Process
Introduction to Title Defects
Several types of title problems can arise even long after you've signed the closing papers and moved your family into your new home. In some situations, the public records that the title search company checked to report a clear title may have had errors in them, may have not been filed properly or could have been complete forgeries. Your new property could also have an issue such as an illegal deed that raises claims about ownership or an unknown lien against the previous owner that has a debt collector asking you for the money as the current owner.
Other common types of title defects deal with finding out some other person or people believe they have a claim on your purchased property. For example, a family member of a deceased past owner might make a claim on the home, or you could find out that an encumbrance exists where a bank has a claim from a prior mortgage loan. In rare cases, the person who sold you the home might've been an impersonator and not had actual ownership of the property, and thus they didn't have the legal ability to transfer it to you.
You can also experience title problems that lead to questions over your use of all or part of the land. For example, there may be an easement that gives a third party access to your property or errors with a property survey that could mean your neighbor has a claim on some of your land.
Read More: How to Overcome a Clouded Title
What Is Title Insurance?
Available both for the lender and owner, a title insurance policy protects against the many title defects possible so that both parties don't lose financially if a claim arises after you have the property's deed. While the title search usually discovers issues, that doesn't mean there aren't hidden problems now or later after you become the owner. The title insurance policy will take over for such issues so that investments stay protected.
A title insurance policy specifies a level of coverage that can range from a standard plan covering basic title issues like public record errors and lack of disclosure to a more comprehensive plan that handles off-record issues, survey errors and post-policy risks. You incur the cost for title insurance at closing and pay a one-time premium. The cost usually is based on your new property's value and any state regulations that control pricing.
Lender's vs. Owner's Title Insurance
Lender's title insurance is a requirement for getting the mortgage, as its purpose is to protect your lender from losing the money loaned to you if a title issue like an unknown lien arises. This kind of policy doesn't cover non-loan-related issues like disputes over use of the land, so it doesn't offer you any protection for your home's equity either. The amount of the lender's policy for title insurance coverage is usually for the home loan amount.
The owner's title insurance policy, on the other hand, is optional but highly recommended due to the risks of going without it and having an unexpected title problem come up later. It usually covers the home's purchase price, and unlike the lender's title insurance policy, it protects you from the array of title issues that affect both ownership and use of your property. For the most protection as a homeowner, you can consider going with comprehensive coverage.
Exploring Reasons for Title Insurance
You might think about going without an owner's title insurance policy to save some money at closing. However, you take on a lot of risks that could later hurt you financially and even make you lose your home in some cases. You may also need title insurance to prove clear title if you decide to refinance your home.
Without the policy, you could find yourself having to pay legal fees to handle disputes in court over the use or ownership of your property and land, and you can run into problems trying to sell your home later if you don't get such issues resolved. In the case of unpaid property taxes or liens, you could get stuck with the expenses, have trouble paying them and possibly lose your home. Disputes over ownership or fraud could also lead to the eventual foreclosure of the home alongside the legal hassles and costs involved.
As long as you have an owner's title insurance policy, you'll benefit from the company's legal and financial help should a title issue arise. For example, you get the convenience of having the insurance company offer you legal help in a claim as well as pay money due over disputes. Therefore, as long as you choose a title insurance policy with enough coverage, you can significantly reduce the potential for financial loss as a homeowner.
Read More: How to Sell a House Without a Title Company
Finding a Title Insurance Company
In some cases, the home's seller may have already selected a title insurance company they want for the transaction, or your lender or mortgage broker may have a preference. If so, it's helpful to do research about the particular company as well as consider their fees before you agree to use them for the title insurance policy. You can discuss any concerns with the seller or lender if you find that you'd rather go with another option. However, keep in mind it can be cheaper, with lower insurance rates for both the seller and buyer if they use the same company for their policies.
Otherwise, you can often shop around for the right title insurance company to find an option that has an acceptable fee and a good reputation. Along with doing online research for local title insurance companies and reading reviews, you could get recommendations from professionals such as real estate agents and lawyers as well as ask other home buyers which company they selected and why. You need to let either the lender or real estate agent know which title insurance company you plan to use.
Your real estate purchase contract specifies who pays the title insurance costs, but usually you have to do so as the buyer. The fee is added to the closing costs you pay when you sit down and sign the final documents at the closing meeting.
Read More: Who Pays Title Costs in a Real Estate Contract?
Using Your Title Insurance Policy
Usually, you receive a notice in the mail if an issue about your home's title arises. If this happens, you need to call your title insurance company as soon as possible with information about the claim and your policy. You can locate your policy information in your home's closing documents if you don't know it.
Depending on the title insurer, you may need to follow up after the call with a certified letter to file a claim. You can then expect the title insurance company to handle the legal tasks associated with the claim as well as pay any money due to the entity making the claim.
- Consumer Financial Protection Bureau: Shop for Title Insurance and Other Closing Services
- Consumer Financial Protection Bureau: What Is Owner's Title Insurance?
- IN.gov: Why Buy Title
- Ohio Department of Insurance: All About Title Insurance
- Rocket Mortgage: Property Title Search: What It Is and How It Works
- Eagle Land Title Agency: The Closing Process
- First American: 10 Common Title Problems
- Consumer Financial Protection Bureau: What Is Lender's Title Insurance?
- Quicken Loans: What Is a Title Insurance Claim and How Do You Make One?
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.