Title Insurance on a Home

Man carrying a title insurance policyIf you're buying a home, you'll likely encounter the term "title insurance" during the mortgage process. But what exactly is title insurance, and is it necessary when purchasing real estate?

In this comprehensive guide, we'll explain what title insurance is, how it works to protect homeowners, the different types of policies, when it's required, what it covers, and more. Read on to get a complete overview of this standard and essential element of the home-buying process.

Key Takeaways on Title Insurance

  • Title insurance protects against defects interfering with the legal ownership of a property.
  • Lenders'Mortgage lenders require lenders' policies to protect their financial interests.
  • Owner's policies are optional but wise to shield the buyer's ownership claim better.
  • Title insurance lasts for as long as you or the lender have exposure related to the property.
  • While not mandatory, title insurance is highly advisable as part of the home-buying process for buyers and lenders.

What is Title Insurance?

Title insurance is a particular type of insurance that protects the legal owner's claim to a property. It insures against defects or problems with the legal title that have occurred in the past.

There are two main types of title insurance policies:

  • Lender's title insurance: This policy protects the lender's financial interest in the property. It ensures their loan collateral (the home) has a valid, enforceable title.
  • Owner's title insurance: This policy protects the buyer's ownership claim to the home. It covers legal costs to defend the title against covered claims.

Title insurance protects against defects like previous liens, unpaid taxes, forged documents, ownership disputes, etc. It provides coverage for the life of homeownership.

Why is Title Insurance Needed?

Title insurance is a risk reduction tool for several parties in a real estate transaction:

  • It protects the buyer's right to own the property after purchase legally.
  • It covers the lender's financial interest in the property as collateral for the mortgage loan.
  • It covers the company that researched the title against legal claims for missing defects.

Though not mandatory, mortgage lenders practically require title insurance during a home purchase. It assures them that their collateral (the home) has a clear legal title.

Title insurance offers protection against mistakes made in the complex title history research process, providing valuable peace of mind.

What Does Title Insurance Cover?

Title insurance covers a variety of defects in the property's title history, including:

  • Errors or omissions in public records
  • Undiscovered liens like unpaid taxes, mechanics liens, HOA liens, etc.
  • Fraudulent documents or deeds
  • missing heirs who have ownership rights
  • Forgeries in the title records
  • Incorrect legal descriptions of the property

If one of these past defects results in a claim against the insured property, the title policy covers the legal defense costs and possible financial damages. This protects against disputes over rightful ownership.

When is Title Insurance Required?

Here is when title insurance enters the home-buying process:

  • The title company will examine the title history when buying a home. This title search aims to identify any defects in the chain of title ownership.
  • The title search results then produce a "title commitment," listing any defects that must be resolved before closing.
  • Once all title defects are cleared, the company will issue a title insurance policy to protect the buyer and lender.
  • Lender's title insurance is mandatory any time you obtain a mortgage loan. It protects the lender's financial interests.
  • Owner's title insurance is optional but highly recommended. It provides lasting protection for the buyer's ownership claim.

Who Pays for Title Insurance?

There are customs around who pays for each title insurance policy:

  • The home buyer typically pays for the lender's policy in the closing costs. Mortgage lenders require this.
  • The buyer chooses whether to purchase an owner's policy for their protection. This adds to the buyer's closing costs.
  • In some states, the seller may purchase an owner's policy that transfers to the buyer. This offsets the buyer's closing costs.

Shopping around between title companies can help you find the best rates. Be sure to compare quotes on both lender and owner policies.

When Does Title Insurance Expire?

Here is the coverage duration for title insurance policies:

  • Lender's policies remain in effect until the mortgage loan is paid off or refinanced. When the loan is satisfied, the lender's interest is released.
  • Owner's policies: These last as long as the policyholder owns the property or has liability based on warranties made in selling the home. Guidelines for owners are meant to be long-lasting.

Unless the home is sold or ownership transferred, the owner's title insurance provides protection indefinitely. It is one of the only insurance products that lasts for life.

Title Insurance vs. Home Insurance

Title insurance and home (or property) insurance offer different protections.

  • Title insurance covers defects and disputes with the legal ownership claim. This is related to past events affecting the title.
  • Home and property insurance covers damage to the physical structure and belongings caused by future events like fires or storms.

While home insurance covers structural damage, title insurance covers legal damage. Both are important, but they protect different exposures around homeownership.

Shopping for the Best Title Insurance Rates

The title insurance rates charged are regulated at the state level. But there are still opportunities to save on title insurance.

  • Compare quotes from multiple title companies before choosing where to get insurance. Rates can vary across providers.
  • Ask your realtor for recommendations on title companies with competitive rates. They often have relationships that lead to lower pricing.
  • Bargain for discounts: Some companies offer discounts for bundling home and title insurance.
  • Refinances or second mortgages often have discounted title insurance rates.

Like other aspects of the closing process, shop around for title insurance when buying a home.

Conclusion

Discuss title insurance early on with your real estate agent and lender so there are no surprises at closing time. Having a clear understanding of title insurance will lead to a smooth transaction.

SOURCE:
https://www.myfloridacfo.com/division/consumers/understanding-insurance/title-insurance-overview
https://www.realtor.com/advice/buy/how-much-does-title-insurance-cost/

https://www.nolo.com/legal-encyclopedia/title-insurance-buyer-needs-36126.html