A Guide To Title Insurance
Imagine this – you've purchased your new home, unpacked the moving boxes, and have finally started to settle in, only to receive an angry phone call a few days later from someone claiming to be the property's rightful owner. It turns out that the seller was a fraud using forged papers to sell a home that wasn't theirs! The worst part? Legally, the home doesn't belong to you, either.
The tragedy!
While this may seem like a far-fetched scenario, over half of all real estate transactions have title-related issues of some kind. Luckily, these disasters are preventable with title insurance — if you can actually figure out how it works! Many new home owners don't quite understand what title insurance is, let alone why it's a necessary purchase. But with this plain English guide, you'll learn what title insurance is in a nutshell and how it will help protect your investment.
First Things First – A Glossary
Title insurance jargon is notoriously confusing, so here are a few key terms translated for first-timers:
Title: A title is the document that proves an individual legally owns a property.
Escrow: Escrow is the period of time where a third party (such as a title company) holds the funds for the home sale until the transaction is ready to be completed.
Title search: During escrow, the title search is conducted to find mishaps in past titles for the property.
Lien: If an individual owes money to someone else, that person (the lienholder) can become the owner of the debtor's property until the debt is paid.
Now that you've mastered the lingo, let's talk about title insurance!
Title Insurance In a Nutshell
Title insurance isn't all that different from other types of insurance, with one important exception: Title insurance protects you from events that happened in the past, instead of events that might happen in the future. For example, homeowners insurance covers losses that may occur from fires and floods, whereas title insurance protects your ownership rights from mishaps in past titles on the home, such as improperly filed paperwork, among many other things. Simple, no?
Owner's Insurance vs. Lender's Insurance
There are two types of title insurance: lender's insurance and owner's insurance. Lender's insurance only protects whoever is issuing the mortgage loan (like a bank), and the policy cost is a percentage of the loan amount — not the home's sticker price. As you make mortgage payments, the policy amount will go down, and once you pay off the loan, the policy ends.
Owner's insurance, on the other hand, protects the home buyer from title-related issues that may arise, even after a thorough title search. The price is based on the total cost of the home, not the loan amount. You pay a one time title insurance fee upon closing, and your policy is valid for as long as you own the home.
Is title insurance even necessary?
Nearly all lenders require a lender's policy to protect their investment in the property — there's no getting around it! In contrast, owner's policies are optional. Though a title insurance company may offer a discount for buying both policies together, there is no requirement to purchase an owner's policy in addition to a lender's policy.
You're probably wondering — why bother paying for an owner's policy if it's not mandatory? Remember that your lender's policy only covers the lender's investment, or the value of the loan. This means that the home's total value isn't covered, so an owner's policy is a small price to pay for protecting the total cost of your investment. Even if you never have to file a claim, your peace of mind is priceless!
The Policy Purchase Process
Before being issued a policy, a title search is conducted to find previous title problems. Any issues are brought to the seller's attention, and it's usually the seller's responsibility to resolve the issues. It's pretty unlikely, but should a seller choose not to clear the title and the insurance company refuse to provide coverage for those issues, you assume the risk of any legal trouble that may arise in the future.
Once your title search is complete, you'll be issued a title insurance policy that essentially guarantees three things: 1) a title search was completed as thoroughly as possible, 2) any title problems were solved and/or accounted for by the policy, and 3) the title insurance company will have your back for any mishaps, so long as they are included in the policy and don't exceed the cost of your home.
Policy Coverage 101
Policy coverage varies by state, county, insurance company, and insurance policy — unfortunately, there's no one size fits all formula for title insurance coverage. Though this list is by no means exhaustive, here are some common scenarios a standard policy may cover:
Fraudulent sellers
Forged documents
Unknown heirs
Certain problems missed during a title search
Improperly filed documents
Of course, there are always exclusions. While you can purchase extended coverage to account for these situations, here are some scenarios that a standard policy won't cover:
Boundary line disputes
Zoning problems
Environmental protection laws
Issues known to the buyer, but off public record and unknown by the title company
Post-policy claims
To ensure that your policy covers what you think it does, make sure that you read the fine print before signing on the dotted line!
Matters of the Wallet
Should you or the seller pay for title insurance? The answer varies by state, or even by county or town. For example, in Illinois the buyer typically pays the lender's policy, but in New Mexico, it's the seller's responsibility. Meanwhile, in Georgia, it's customary for the seller to purchase both the lender's and owner's policy!
To make matters worse, title insurance costs also vary by location. Certain states regulate how much title insurance companies can charge for their services, whereas title fees in other states include additional services. For example, a higher title insurance fee could mean that title search costs are included, or it could just reflect the market in the area where the policy was issued. Since costs vary so much, be sure to research your state or county's title insurance rules and regulations — this rate estimator makes it easy!
Common Mistakes and Misconceptions
It may seem counterintuitive, but title insurance only covers you for events that happened before purchasing the policy; any mishaps that happen after policy signing aren't covered. For example, if you bought a policy on April 7th, and on April 8th an undisclosed heir files a lawsuit, your title policy won't cover you. However, if your title search missed a publicly-accessible lawsuit filed by an heir several months prior to purchasing the policy, then you're covered.
You're also not obligated to buy title insurance from your real estate agent or lender's recommended title insurance company. While you may get a discount for doing so, you can shop around to find a policy that works for you (and your wallet!).
Title insurance isn't so scary, right? At the end of the day, it's simply an insurance policy that ensures that what will probably be the biggest investment in your life actually belongs to you. By purchasing a title insurance policy, you don't have to worry about legal nonsense and can focus on truly making your new house a home.