There are two types of Title Insurance in real estate: an owner’s policy and a lender’s policy. Continue reading to learn about each policy’s purpose, who and what it covers, and who pays for title insurance.
What Is Title Insurance?
Title insurance protects homebuyers from title defects or flaws caused by a previous owner. It also protects the new buyer from someone contesting their legitimacy as a homeowner and claims to the land.
In reality, there are two title insurance policies: one for the buyer and one for the lender. The latter requires protection as well because they are providing the mortgage to purchase the home.
Let’s take a quick look at two situations where a title policy would be beneficial.
Assume you buy a house, move in, and then discover four months later that the previous owner’s ex-wife claims she was also on the mortgage but was never consulted about the sale.
The courts may rule in her favor, and the sale may be challenged or even reversed.
Alternatively, long after you’ve purchased your home, your neighbors may contest the boundary line, claiming that a portion of your property is actually theirs. Without title insurance to prove otherwise, they may be able to file a successful case.
This is why, before closing on a property, a thorough title search is performed. This is known as the “abstract of title” or “chain of title.” Getting title insurance ensures that nothing was overlooked during the title search.
The Two Types of Title Insurance Policies
There are two kinds of title insurance policies:
1) lender’s title insurance policy and 2) owner’s title insurance policy.
When purchasing a home with a mortgage, the homebuyer is required to pay for the lender’s title insurance coverage. A lender policy is not required if you buy a home with cash because there is no bank involved.
A Lender’s policy protects the mortgage company against potential losses equal to the total loan value. Owner’s title insurance is optional and is paid at closing as a one-time fee.
Do You Need Title Insurance?
It may appear that title insurance is a no-brainer. It is, after all, an investment in peace of mind, just like other types of insurance.
However, if you are the buyer, title insurance is not always required. As previously stated, title insurance is classified into two types: lender’s title insurance and owner’s title insurance.
If you take out a mortgage to buy a home, your mortgage lender will require lender’s title insurance to protect their interests.
However, an owner’s title policy is likely to be optional, so you could buy a house without paying to insure your title claim.
That being said, unless you’re buying a new construction home in which no one has previously held the title, skipping the insurance could be risky.
If someone is able to challenge your ownership, you could face a costly legal battle or even lose the house.
Who Has to Pay for the Title Insurance?
The actual law that determines who must pay the title insurance cost varies from state to state and even from county to county.
Because the buyer is the one taking out a loan with the mortgage lender, the cost of the lender’s title insurance (or lender’s policy) usually falls on him or her.
The cost of the owner’s policy is optional and can be negotiated in terms of who pays. In some cases, the seller may be willing to pay for this policy in order to sweeten the deal on their home and ensure a clear title.
To be safe, check with your local laws before volunteering to cover those costs.
Who Selects the Title Company?
Who chooses the title company can be negotiated in the same way that who pays for it is.
Remember that if you’re paying for one of the policies, no one else can tell you which title company to use.
It’s also important to note that title insurance companies, which cover any claims and losses, are not the same as a closing attorney or title company, which handles the home closing.
Furthermore, the buyer should never use the same title insurance company that the seller used when they bought the property.
It’s unlikely that the same company will discover anything different, which could be a major issue later on. It’s better to let another insurer investigate any problems.
Is the Price of Title Insurance Regulated?
Another aspect of title insurance varies by state. Fortunately, you can find out about any regulations that may apply to the cost of title insurance by contacting your state’s Department of Insurance.
Regardless of your state’s regulations, the cost of title insurance will be a percentage of the home’s purchase price.
The title insurance premiums will then range between $1,200 and $2,500 for the majority of homes. You can usually save money by purchasing both policies from the same company.
How Much Does the Policy Have to Cover?
Finally, the amount of coverage you receive from a title insurance policy is determined by your budget. This is why buyers should exercise caution when allowing the seller to handle this step.
It may sound appealing to save money, but it may come at the expense of a subpar policy. As a result, buyers should specify what the insurance must cover.
A policy may cover any combination of the following:
- Back Taxes
- Conflicting wills
- Filing Errors
- Liens from HELOCs, unpaid contractor bills, or other companies
- Spousal claims
- Title forgeries
- Undocumented easements
- Unknown heirs who claim ownership of the estate
Again, as with other types of insurance, you can choose to supplement the standard version to meet your specific needs.
Perhaps you intend to build on your new property and want to pay for additional protection in case your construction inadvertently violates the restrictions of your new subdivision.
You should also find out what your lender has to say about their title insurance policy.
For example, if you choose an adjustable-rate mortgage (ARM), they may require an endorsement on the policy stating that they would be paid first if you went into foreclosure.
In short, buyers have many options when it comes to the type of coverage they want in their title insurance policies. It all depends on their specific requirements and their willingness to pay.
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To Round Up
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