What is Title Insurance?
When buying a home, one of the many essential steps in the process is obtaining title. This legal concept confirms that you have received ownership rights for the property from the seller. But what happens if there are legal or financial problems with the sale? Your new home could end up costing you more than the purchase price in unforeseen complications. That’s where title insurance comes in. If you’re shopping for a home, title insurance is a must-have. We’ll break down exactly how it works and what makes it so important.
If you take out a mortgage loan when you buy your property, your lender will require a loan policy of title insurance. This protects the lender's interest in your property until your loan is paid off or refinanced. On the other hand, an owner's policy of title insurance insures your ownership rights to the property.
If you’re working with a title company, you’re less likely to encounter these problems after the fact, but it still pays to have a policy. In fact, title companies offer policies alongside their title search, which is the process during which a title company ensures that the seller has the legal right to transfer the title to you. With title insurance, buyers and lenders are protected against any deficit in the title that might cause serious losses.
Two Types of Title Insurance
There are two types of title insurance: owner’s title insurance and lender’s title insurance. Both provide important protections for different participants in a real estate transaction, and it’s important to be able to distinguish between the two and what they cover. Most owner’s title insurance policies are purchased as a guarantee against potential hazards. Although optional, an owner’s policy typically protects the home buyer from the most common risks.
A lender will always require the borrower to purchase a lender’s title insurance policy before obtaining a home loan, and the policy is usually issued by the title company to mark the conclusion of their title search.
The basic functionality is the same as that of an owner’s policy: to protect the lender against potential losses in the event that the seller is not legally able to transfer title rights. The lender is covered up to the amount of the mortgage. Only the lender is protected by such a policy, however.
If you end up saddled with back taxes and aren’t personally insured, a lender’s policy won’t protect you, but an owner’s title insurance policy will. Depending on the insurance provider and the state in which you live, a policy can cost $500 – $3,500. If the seller is the one purchasing the owner’s policy, the cost could be factored into the sale of the property.
Although lender’s title insurance is almost always required, an owner’s policy is optional. That being said, the consequences of not purchasing owner’s title insurance can be dire. Should unpaid taxes, outstanding liens or fines for code violations rear their ugly head after the property has been purchased, then the financial burden will fall solely upon the uninsured homeowner.
With a title insurance policy, the homeowner is protected for as long as they own the property.
Buying a home can be a stressful experience. Fortunately, there are ways to protect yourself, including title insurance, which can offer peace of mind. If you’re ready to start looking for a new home, make sure you choose the right title company to help you in your search.