What is Title Insurance?
Title insurance is a type of insurance that protects the owner of a property from any financial or legal repercussions caused by issues with the title. The title is a legal document that grants the holder ownership rights over a property and all the privileges that come with it.
The title will also reveal if there are any liens against the property due to unpaid loans, bills, or taxes. So, the title is an essential document, and any issues with it can result in problems for the owner. Title insurance protects against any financial losses or legal disputes arising from pre-existing problems with this important document.
Title Insurance Explained
Mortgage lenders typically require title insurance to finance the purchase of a home. It not only protects the lender, but it also protects you from any unforeseen issues. Depending on how old the property is, it may have transferred ownership dozens of times, and each time it’s sold, there’s a greater possibility of a mistake or baggage due to the owner’s actions. While the lender will also do a title search, there’s always a chance that something could be overlooked or won’t appear in the public record.
Owner’s Title Insurance Coverage
Conflicting Ownership Claims
Title insurance protects against any contradictory ownership claims. For instance, if a previous sale was not executed properly and the former owner still technically has ownership rights, it may cause issues for your sale. So, title insurance will cover the costs of hiring an attorney and other professionals to help you sort that out.
Outstanding Lawsuits
Title insurance will also cover the costs of settling any outstanding lawsuits. Say the former owner was being sued, and the claimant attempted to go after the property. Title insurance will cover your legal expenses if you inadvertently get in the middle of the suit.
Flawed Public Records
Public records aren’t always perfect, and typos or flaws can cause potential issues and delays. Say, for instance, the previous owner’s name was spelled wrong on the title, or a lien meant for someone else was accidentally filed against your property. These issues can be costly to fix, so title insurance will cover the expenses if needed.
Outright Fraud
Title insurance will also protect you in the event of outright fraud. Say the seller got you to agree to the sale under false pretenses, but you only discovered the lies after making a purchase. Title insurance would help mitigate any financial losses that resulted from the fraud.
Forgery
Title insurance also protects you against any issues related to forgery. Criminals will sometimes access public records to find homes with accrued equity, then forge documents transferring the ownership to themselves. If you are the victim of this type of title fraud, your insurance policy will protect you.
Undisclosed Easements
An easement is a right granted to a person who is not the owner, allowing them to access the property under specific circumstances. The owner or title company must disclose easements; your title insurance policy will protect you if they do not.
Lender’s Title Insurance Coverage
In addition to the owner’s title insurance, the lender will also take out their own policy to protect their interests in case of any issues or disputes. A lender’s title insurance covers most of the same as the owner’s policy, but it will only protect the lender from loss or liability.
Issues with the title can greatly impact the lender as well. For instance, if someone else claims they have ownership of the home, it may impact the lender’s own claim against the property and make it harder to collect payment. So, title insurance protects them against any issues affecting their investment.
Title Insurance Alternative: Warranty of Title
Another option that you may consider is called a warranty of title. This is a legal agreement signed by the seller that affirms there are no outstanding issues with the title. The warranty affirms that the seller is willing to assume repercussions if any problems with the title are discovered, and the buyer may sue if that happens. Most transactions include a warranty of title automatically. However, some do not, such as estate sales or property auctions. A lender may still require title insurance if you’re financing the purchase, but if you pay cash, a warranty of title may suffice.
Title Insurance Cost
The exact cost of a title insurance policy varies depending on the state but is typically around 0.5 – 1% of the home’s sale price. So, if the home is worth $200,000, the title insurance policy will likely be about $1,000 - $2,000. When buying a home, factor this additional fee into your estimated closing costs.
Title Insurance Bottom Line
Title insurance is a necessary expenditure when purchasing a home. The chances of an issue with the title are greater than you may think, and potential problems can be costly and time-consuming. So, while it may seem unnecessary, the cost of being protected is usually far less than the cost of mitigating any problems.