An exciting — and crucial — part of the homebuying process is getting the title to your new home. The title is tangible proof that the property is yours, representing that you have a claim to the property and clear ownership rights.
A problem that might pop up unexpectedly — leaving your asset vulnerable — is the home's title defects, such as property boundary line or ownership disputes, inaccurate property descriptions, and missing info on the title. That's where title insurance comes in. It protects the lender or you against any financial losses should title issues arise, such as inaccuracies in public records when you purchase a property.
In this post, we'll take a deeper look at how title insurance works, what it covers, and the different types of insurance available.
What is title insurance?
Title insurance can financially safeguard you or the lender against losses incurred due to title defects when you bought the property. These issues might include:
- Inaccuracies, mistakes, or missing information in public records
- Encroachments
- Disagreements regarding property ownership
- Unknown liens
- Illegal records
- Encumbrances
- Discovered easements
- Undiscovered wills
- Missing beneficiaries
- Forged documents and deeds
- Disputed in the survey
- False impersonation
As you can see, many different defects can occur with a title, and there's a chance that you can get blindsided by one or more of these issues—which can be stressful, time-consuming, and costly.
How does title insurance work?
Before a title insurance company even offers you a policy, it will comb through title plants — databases of property information — to see any defects in your title. The insurance company might also look at public records, which can include:
- Deeds
- Mortgages
- Wills
- Divorce decrees
- Bail bonds
- Liens
- Encumbrances
- Court judgments
- Maps
This search gives results of the investigation, which includes information such as:
- The owner of the property
- Outstanding debt on the property
- Condition of the title
When you receive the search results, you get a chance to resolve any problems and defects in the title. The insurer company will cover you or your lender for financial losses outlined in the policy up to coverage limits — plus any eligible legal expenses.
What does title insurance cover?
As mentioned, it covers the loss of money from a covered defect in your title.
First, let's look at what a basic policy typically covers:
- Ownership by another person or party
- Wrong signatures on documents. This includes fraud and forgery
- Unrecorded easements
- Improper execution of documents
- Incorrect interpretation of wills
- Mistakes in legal descriptions of the property
- Outstanding lawsuits and liens
- Records that are flawed
- Unpaid taxes or assessments
- Conflicts in property boundaries
Title insurance isn't the same as a homeowners insurance policy or home warranty. In turn, here's what a basic policy typically doesn't cover:
- Natural disasters
- Earthquakes and floods
- Broken or damaged heating or cooling systems
- Broken, damaged or destroyed home appliances
- Events, defects or incidents that happened after the title insurance policy was issued.
- Known circumstances or risks.
Something to keep in mind: What your insurance covers can vary by state. For example, in the state of California, a basic policy covers defects reflected in public records, such as easements, recorded liens, and unpaid taxes. An extended title insurance policy is available and also covers defects that aren't found in public records or are off the record.
Types of title insurance
Title insurance falls into two main types: owner's title insurance and a lender's title insurance.
The owner refers to the party buying the property — not to the owner of the property that's selling. The lender refers to the mortgage company or bank offering the home loan:
What is lender’s title insurance?
Your financing partner will typically require lender's title insurance. It safeguards them from any defects in the property title and ensures their investment in the property takes priority over claims other parties might have in your home.
Lender's title insurance is usually an added cost for buyers and is baked into the terms of your mortgage.
What is owner's title insurance?
Owner's title insurance is a bit of a misnomer — but it's for the soon-to-be owner or current buyer, which is you. It protects you while you own the home and is limited to the covered policy defects and limits.
How much does title insurance cost?
Unlike homeowners insurance, which involves footing the bill for monthly premiums, title insurance costs involve a one-time fee. It typically ranges from $500 to $3,5000.
The cost might also be a flat rate, which is anywhere from 0.5% to 1.0% of the property's purchase price. It's usually less expensive to buy owner's title insurance and lender's title insurance at the same time.
The cost of coverage varies and is based on the following:
- The state where you live
- The insurance provider
- The purchase price of your property
Do I need title insurance?
While it’s an added cost, there are good reasons for purchasing a policy. Imagine landing on the home that checks off all the boxes—only to find a costly issue with the title.
A small upfront investment can cover significant financial losses, protect the buyer and lender, and help ensure every step of your homebuying pursuits goes smoothly.
Common risks, issues, and defects might arise in buying a home, such as forged signatures, wrong ownership, or unpaid taxes. Title insurance can foot the bill for hefty losses you'd otherwise pay out of pocket. It can protect buyers and lenders from
In many cases, it's required to have both owner's title and lender's title insurance. If you are paying for the home in cash, you will still need the owner's title insurance portion. You can purchase it from the title insurance company when closing on a property.
Do I need title insurance if I pay cash?
Many wonder whether title insurance is necessary when purchasing a home in cash. Although it's not required, it's a good way to protect your investment. Buying a home in cash may reduce some risks associated with financing, but it doesn't eliminate title issues like liens, encumbrances, or fraud.
Final thoughts
Homebuying can feel overwhelming enough without running into title issues. Overlooking these matters can lead to costly, time-consuming hurdles in securing your desired home. Title insurance is an investment that can save money and make for a successful, smooth-sailing homebuying process.
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