Title insurance is a type of indemnity Insurance that protects homebuyers and lenders from financial loss due to defects in the title to a particular property. Lender’s title insurance is the most popular type of title insurance. This insurance protects the lender and is often purchased by the borrower. To protect the buyer’s equity, the seller may also purchase owner’s insurance.
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Understanding Title Insurance
For any real estate transaction, a clear title must be obtained. Title companies must search every title for any claims or liens before they can issue them.
Title searches are a thorough examination of public records that determine the legal ownership of a property and whether any claims are pending.
Lenders and homebuyers are protected by title insurance against damage or loss due to liens, encumbrances or defects in the property’s title, or actual ownership. Back taxes, liens, home equity credit (HELOCs), easements, and conflicting wills are all common claims against a title. Title insurance does not protect against future events like traditional insurance.
The following are common hazards that a basic owner’s policy covers:
- Another party owns the property
- Incorrect signatures on documents can lead to fraud and forgery.
- Flawed records
- Restrictive covenants are terms that decrease value or enjoyment, such as unrecorded agreements.
- Judgments or encumbrances against property, like outstanding lawsuits and lien
Different types of Title Insurance
There are two types title insurance options: owner’s insurance (including extended policies) and lender’s insurance. Most lenders require that the borrower purchase title insurance to protect the lender in case the seller is not legally able transfer title ownership rights. The policy protects the lender from loss. A lender’s policy protects only the lender against loss.
title search aren’t infallible, and the owner is still at risk of financial losses. Therefore, an owner’s policy of title insurance provides additional protection. 2
Owner’s title insurance might be something you consider once you have your home. As you pay down your mortgage, your ownership of the property increases. You have less to lose in the event of a claim. This is particularly important if your plan to spend a lot of time in your house.
Purchase Title Insurance
After the property purchase agreement is signed, an closing agent or escrow initiates the insurance process. Fidelity National Insurance Co. and Old Republic National Title Insurance Co. are the four main U.S. Title Insurance Underwriters. You can also choose from regional title insurance companies.
Owner’s title insurance costs range from $500 to $3500 depending on where you live and which insurance provider you choose.
In order to ensure that everyone is properly protected, both a lender’s and owner’s insurance policy may be required. The parties pay a one-time payment to purchase title insurance at closing. The Real Estate Settlement Procedures Act prohibits sellers to require purchase from a particular title insurance carrier in order to prevent abuse. 6
There are risks to not having title insurance
In the event of a title defect, transacting parties are exposed to significant risk if they don’t have title insurance. Imagine a homebuyer looking for the perfect house only to discover that the previous owner has not paid property taxes. The buyer bears the entire financial responsibility for any claim for back taxes without title insurance. The buyer will have to pay the property taxes or lose the home.
The same applies to title insurance. The coverage protects the buyer as long as the property is theirs. 2
Lender’s title insurance protects banks and mortgage lenders against unrecorded claims, access rights, and other problems. If a borrower’s default is not recorded, any problems with the title of the property would be covered by the lender’s title insurance.
Before purchasing any property, real estate investors need to ensure that it does not have a poor title. For example, homes in foreclosure may have numerous outstanding issues. To protect themselves from unforeseen claims against their title, buyers may want to purchase owner’s title coverage.
What are the different types of title insurance?
There are two types title insurance options: owner’s insurance (including extended policies) and lender’s insurance. Most lenders require that the borrower purchase title insurance to protect the lender in case the seller is not legally able transfer title ownership rights. The policy protects the lender from loss.
Title searches are not always reliable and owners can still lose their money. This is why an owner’s policy of title insurance provides additional protection. Optional owner’s title insurance is often purchased by the seller in order to protect the buyer from defects in the title.
How can I purchase title insurance?
After the property purchase agreement is signed, an escrow agent or closing agent initiates insurance. In order to ensure that everyone is properly protected, both a lender’s and owner’s insurance policy will often be required. The parties can purchase title insurance at closing for a one time fee. Owner’s title insurance costs $500 to $3500 depending on where you live and which insurance provider you choose. 5
Why should I purchase title insurance?
In the event of a title defect, transacting parties are exposed to significant risk if they don’t have title insurance. Imagine a homebuyer looking for the perfect house only to discover that the previous owner has not paid their property taxes after closing. The buyer bears the entire financial responsibility for any claim for back taxes if they don’t have title insurance. Title insurance covers the buyer as long as the property is theirs. The lender’s title insurance protects banks and other mortgage lenders against unrecorded claims, access rights, and other problems.
