Often, buying a house may be one of your most significant purchases in life. If you are familiar with any form of dispute, it is usually the last thing you want.
The worst form of a dispute is another person making a legal claim on a property you already paid full price for. It is a long, stressful, expensive, and time-consuming ordeal.
Title insurance comes in at this point to help you mitigate risk. Because we enjoy giving you tips to help you financially, we will share all there is to know about it.
However, before we move on to the main topic at hand, here is a video to help you understand title insurance better.
What is Title Insurance? Title Insurance 101
Firstly, it is essential to note what the title means in this context. The title to a property is the evidence of lawful ownership or possession of the property.
Title insurance protects:
- Real estate owners
- Homebuyers and other related agents against losses, damage, or property loss due to problems with the property’s title
Depending on the policy, title insurance companies usually pay for specified legal damages from post-sale disputes. As a potential buyer, you will need to ensure that title is clear and free from ownership claims to avoid future costs.
A significant factor that differentiates title insurance from other insurance forms is the type of event they protect you from. Other insurance policies cover you in unforeseen future circumstances, while title insurance protects you from past issues.
In some cases, you can get a warranty of title from the buyer during private transactions instead of title insurance. It is a document that guarantees that the said seller has the right to transfer ownership and no one else owns the property.
How Does Title Insurance Work?
Having a clear title is an essential part of real estate transactions. Title companies will typically run a title search on every title to ensure they have no liens or claims before issuing them.
Title searches help confirm the legal ownership of a property by examining public records to see if there are claims on it. In simple terms, it makes sure the seller owns a property or has the right to sell it.
After running a title search on a property, the company will start the underwriting process if it’s clear. They assess issues like:
- Unresolved building code violation
- Erroneous surveys
They also search for potentially undiscovered issues and offer a quote based on the risks. Too many challenges with a title can make title companies refuse to provide you with a policy.
Some commonly filed claims against titles are:
- Mortgage or loan liens
- Back tax
- Home equity lines of credit (HELOC)
Title insurance usually protects against matter like:
- Another party ownership (a recently materialized heir)
- Forgery, fraud, or incorrect signatures on a document
- Encumbrances like liens, outstanding lawsuit, and other judgments against the property
- Problematic records
- Things like unrecorded easements and other restrictive agreements that reduce the value of a real estate purchase
Types of Title Insurance
Two types of title insurance exist to protect all pivotal participants in a real estate deal. These two types are owner’s title insurance and lender’s title insurance.
Lender’s Title Insurance
A lender’s policy is liability protection for lenders, especially on mortgages. If claims come up during the duration of the mortgage, this policy protects them.
Lender’s insurance typically lasts the length of a mortgage. Lenders require a borrower to get it to protect them from loss.
Owner’s Title Insurance
An owner’s title insurance isn’t compulsory, but it is an excellent idea. It protects you as a homebuyer.
To err on the side of caution, even if you get a warranty deed from the seller, the policy can still help. A warranty deed confirms that the title is clear, but the policy enables you to cover the costs in case of an issue.
Title searches are not bulletproof, so a bit of extra help is always welcome.
What is the Coverage of Title Insurance?
Title insurance helps you get financial protection on your investment. The classic premium of title insurance is for comprehensive coverage.
The comprehensive coverage includes the homeowner’s title insurance policy and the lender’s policy. The lender’s policy is just as we discussed above in the types of title insurance.
However, the homeowner’s policy included more than what is mentioned above. Here are some coverages of a homeowner’s policy.
Coverage for Building Permit Violation
This coverage allows the policyholder to remove structures that the previous owner built without the necessary permits.
Boundary walls and fences are excluded from this policy. It covers up to $25,000 after a deductible.
It helps to ensure that the property address and the address on the insurance document are the same.
If a policyholder needs to remove or fix an improvement for violating zoning laws by force, they will be covered by zoning coverage.
Restrictive Covenant Violation
Sometimes, someone may make an effort to force a restrictive contract on you because of a violation before the policy date. This coverage helps to protect you from losing your title when such events occur.
This one simply protects you from ownership claims after the policy.
It protects you from supplemental taxes for previous construction, ownership change, or change of use.
It extends the protection of the policy to feature a trust that you create.
Subdivision coverage is for land that wasn’t correctly divided before purchase that limits the policyholder from:
- Closing sales
- Getting a building permit
- Getting a loan
Subdivision coverage covers up to $10,000 after deductibles are removed.
It protects you from people building structures that encroach on your insured land. If they are building boundaries like walls or fences, however, it does not count.
Coverage for Structure Damage Due to Resource Extraction
It protects existing structures and future improvements on your landscape. It also covers damage caused by other people using the land to extract and develop water, minerals, and other substances.
The Value of Title Insurance
Title insurance is a little known but extremely valuable insurance type. People who are familiar with land and housing disputes are better equipped to tell you how strenuous it gets.
Dealing with such a terrible card as real estate disputes without insurance isn’t an ideal situation. Here are three reasons why title insurance is extremely valuable.
- It helps in protecting its policyholders from numerous unknowns.
- It offers a beneficial protection type at an excellent rate.
- It is beneficial for the United States as a whole, not only as an individual.
The Cost of Title Insurance
Title insurance has a one-time premium. The average is between 0.5% and 1% of the home’s total value.
Some states do not regulate title insurance, so the price may vary. The premium payment is typically required at closing.
Is Title Insurance For You? How to Know If You Need Title Insurance
Mortgage lenders usually require title insurance from homebuyers. However, they only demand this for their protection (lender’s title insurance).
If you want to protect yourself from the responsibility for title issues, you will need to get a separate policy for yourself.
That being said, title insurance policies are for homebuyers and mortgage loaners. So if you are in this category, you should get a title insurance policy.
Sometimes, title searches may come up clean because of unrecorded data, so they have a limit. Except you don’t mind paying all the bills for future title claims, we advise that you get title insurance.
What Risks Come with Not Having Title Insurance?
The absence of title insurance puts transacting parties at risk in case a title defect occurs. After closing a deal for your dream house, you can stumble on issues that you will pay for from your pocket without title insurance.
Some of these risks are:
- Back taxes
- Unrecorded liens
- Unrecorded access rights
- Other defects
Title Insurance Shopping
It is common to get recommendations for title insurance companies from your title search company, mortgage lender, or real estate agent. However, you can shop around because it’s not compulsory to follow them.
Every company offers different rates, so you will do your best to find the ones that work better for you. Things you should consider while shopping includes:
- A reputable company
- Stability since your home will be around for a long time
- Willingness to answer all your questions before and after purchase
Making the Final Purchase
After you complete the purchase agreement, a closing agent or an escrow will initiate the insurance process. The four major title insurance underwriters in the United States are:
- Fidelity National Financial
- Stewart Title Guaranty Company
- First American Title Insurance Company
- Old Republic National Title Insurance Company
The Real Estate Settlement Procedures Act (RESPA) prohibits sellers from demanding that you get your insurance from a particular carrier. This Act helps to prevent abuse.
Lastly, there are regional title companies you can choose to get insurance from.
If you are getting a house or any form of real estate anytime soon, we highly recommend title insurance. Although we focused on your dream house in this article, you can get title insurance for all forms of real estate and landed properties.
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Can’t get enough? Here’s more:
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