Making sense of title insurance may seem difficult, but once you grasp the concept you will be able to understand why you probably need it.
Title insurance is a fee you may pay at closing when taking out a mortgage. Title insurance protects the lender, and it’s a one-time charge premium. To protect yourself, you can also purchase the owner’s title insurance.
Read on for more information on what title insurance is, what it covers, and how much it costs.
What Is Title Insurance?
When you buy property, you receive a document called a “title.” The title proves that the property was transferred to you by the previous owner and states your homeownership rights. Title insurance protects these rights against any third party who challenges your ownership. Title insurance also covers any financial loss from defects in the title. Defects can occur anytime, even after years of peaceful ownership.
Before closing with your mortgage broker, a clear title will be necessary. This shows that the current owner, who is also the seller, has complete property ownership which can be transferred to you. Your mortgage lender will order a title search, which is a review of public records related to the property.
The search is to help determine and confirm legal ownership of the property. The search also helps find any defects that could affect future property rights. These defects could be in the form of liens or encumbrances.
If the title search reveals a problem, the title company will try to resolve it. However, some issues may be so significant that they derail the sale of the property completely.
What happens if the title search doesn’t reveal any problem or title defect? You still need to buy title insurance as title searches are not faultless. There is still a risk of financial loss from undiscovered issues that could put the property’s ownership into dispute. Even years after you purchase your home, there is a need for additional title protection.
Types of Title Insurance
Title insurance is not a monthly premium that adds to your mortgage payments. Instead, title insurance is a one-time upfront fee. There are two types of title insurance:
1. Lender’s Title Insurance
Lenders require that a borrower purchase a lender’s title insurance policy. The policy protects the lender from financial loss.
Is lender’s title insurance negotiable? – No, you have to buy the policy anytime you take out a mortgage.
Is lender’s title insurance required for a refinance? – Yes, you must buy a new lender’s title insurance policy when refinancing. The requirement applies even if using the same lender for the new loan. However, a discount may be available if refinancing when your loan is not more than ten years old. If you availed yourself of the homes for heroes program in your area, you can also get a discount for title services.
2. Owner’s Title Insurance
Owner’s title insurance is optional. The policy protects the homebuyer’s equity in the property. Furthermore, the policy covers the buyer’s right to live in the home even if a claim arises after purchase.
Do you need owner’s title insurance? – Since it’s not mandatory, you may want to skip an owner’s title insurance policy to save money. Many buyers may not consider purchasing the policy, especially if the title search reveals no defects.
However, ownership of real estate isn’t always simple. A title defect after closing your mortgage could come with legal costs. You also risk losing your home as well as your financial investment. A title insurance policy protects against both financial loss and your home, so you should certainly consider it.
Do you need the owner’s title insurance to refinance? – You only buy the owner’s title insurance once. The policy stays in effect even after refinancing, so you are not required to renew or replace it. You also aren’t required to have owner’s title insurance to refinance your home.
What Does Title Insurance Protect You From?
There are many reasons that your title or ownership of a home could become a matter of dispute. This could cause you to lose possession of your home. Some of these undiscovered issues could include:
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- A mistake in the ownership history
- An oversight by the title company
- A previously unknown heir
- A pending lawsuit or legal judgment
- Fraud
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Luckily, owner’s title insurance protects against the following:
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- Survey errors
- Boundary disputes
- Unpaid property taxes
- Property deed errors
- Conflicting wills
- Forge power of attorney
- Encroachments
- Third-party ownership claim
- Forgery and fraud
- Flawed records
- Encumbrances
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As a buyer, owner’s title insurance protects you for as long as you own or have interests in the property.
How Much Does Title Insurance Cost?
Sometimes, a homebuyer may negotiate to have the seller pay for the title insurance cost. Even if the cost falls to the buyer, the policy is not overly expensive. The fee ranges between $500 and $4,000. The cost depends on the state, insurance provider, and home’s purchase price.
Some states, such as Texas, regulate insurance rates. Therefore, there may not be a significant cost difference among insurers. In other locations, however, title insurance can be an outstanding closing cost.
To prevent extortion, RESPA prohibits requirements by sellers to purchase from a specific insurer. Lenders need to provide a list of title insurance providers in the buyer’s area. The buyer is also not restricted to the lender’s list. As a buyer, you should shop around for the best coverage at a low cost.
What Is the ALTA Homeowner’s Policy of Title Insurance?
There are two ALTA-certified owner’s title insurance policies: the owner’s policy and the homeowner’s policy. The owner’s policy protects against title defects and liens. The protection lasts from the title’s history to the time it gets to the public records.
Homeowner’s policies provide coverage for additional risks, some of which might occur after recording the deed. A homeowner’s policy protects you for as long as you or your beneficiaries own the property. Some additional coverage you enjoy with a homeowner’s policy includes:
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- Building Permit Violation Coverage: This applies when you have to remove a structure built by a previous owner but without the required permits.
- Subdivision Map Act Coverage: Applies if land subdivision took place before purchase. Due to the improper subdivision, you are unable to close a sale or secure a loan.
- Location Coverage: Ensures the property has a similar address as the home insured in the policy.
- Restrictive Covenant Violations Coverage: Protects against loss of title through attempts to enforce a restrictive covenant.
- Zoning Coverage: Protects if forced to remedy a structure violating zoning laws.
- Post-Policy Coverage: This coverage protects against post-policy ownership claims. These claims could be a result of forgery or encroachment.
- Encroachment Coverage: Protects against a third party building a structure that encroaches on the property.
- Supplemental Taxes: Protects against such taxes for construction or change of use.
- Coverage for Structure Damage from Extraction of Minerals, Water, and Other Substances
- Automatic Coverage Increases
- Living Trust Coverage
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What Is EPA Endorsement Title Insurance?
EPA Endorsement is ALTA’s Environmental Protection Lien. The endorsement protects the insured against damages on their residential property. The damages have to be due to environmental liens not declared as exceptions to the title policy.
Final Thought
Title insurance is a little-known and underutilized protection against losses that come from defects in the title. Although policies are specific to the state, the concept of title insurance stays the same. It seeks to protect both the buyer and seller from losses they may suffer due to undisclosed or defective titles.
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