Title Insurance - What Is It? Why Do I Need It?
If you are buying a house with a mortgage, one of the closing costs you will be incurring is TITLE INSURANCE! Title insurance is a crucial component of the real estate transaction process, providing protection and peace of mind to both lenders and owners. Two types of title insurance policies are normally involved in a real estate transaction: the lender's title policy and the owner's title policy. In this post, I'll explore the key differences between these two types of insurance policies.
LENDER'S TITLE POLICY
The minimum title policy you will be required to get (if you are buying the house with a mortgage) is the Lender's Title Policy. The lender will require that you purchase this type of policy. Unlike homeowners insurance, where the lender is collecting the premium monthly, putting it into an escrow account and then paying the insurance company on your behalf - title insurance is a one time premium you pay at closing.
The lender title policy is there to protect the lender against potential losses in the event that the seller cannot transfer the title rights at closing. But keep in mind - it is only the lender that is covered (not you, the buyer) and the lender is covered up to the loan amount! The coverage amount will decrease as the mortgage balance decreases. It is a lender's way to make sure that the property they are putting the loan on has a clean and marketable title, which means that there are no outstanding liens or judgments or other legal issues that could jeopardize the lender's security interest in the property. It protects the lenders against financial losses resulting from unforeseen title defects or legal challenges that may arise after the property is purchased. Common covered issues could be undisclosed liens, errors in public records, and legal disputes over ownership.
Keep in mind that a lender's title policy is NOT transferable and does not protect the borrower's interests. If the homeowner refinances the mortgage, or gets a new mortgage, a new lender's title policy is usually required!
OWNER'S TITLE POLICY
Unlike the lender's title policy, the owner's title policy is designed to protect the interests of the property owner. When a homeowner purchases a property, they want assurance that their ownership rights are secure and that they won't face unexpected legal challenges or financial losses due to title issues.
An owner's title policy provides broader coverage than a lender's title policy. It typically covers the full property purchase price and lasts for as long as the owner or their heirs have an interest in the property. Coverage includes protection against a wide range of title issues, such as forged deeds, undisclosed heirs, and boundary disputes. Other issues that the owner's title policy will protect against include conflicting ownership claims, outstanding lawsuits/liens and other encumbrances against the property that could invalidate the seller's claim, even errors on public records such as incorrect signatures. Undisclosed easements that may limit the usage or reduce the value of the property and outright fraud and forgery are also covered. Unlike the lender's title policy, the owner's title policy is designed to protect the interests of the property owners. When a homeowner purchases a property, they want assurance that their ownership rights are secure and that they won't face unexpected legal challenges or financial losses due to title issues.
Unlike the lender's policy, if the homeowner were to refinance the mortgage, they are not usually required to get a new title policy.
SOME FREQUENTLY ASKED QUESTIONS
Over the years I have worked with many buyers. Sometimes, we as Realtors, forget that buyers do not do this every day or even every year. And for first time home buyers, they have never done this. So it is not unusual to get a lot of questions on Title Insurance and why they need to have this protection! Here are some of the questions I have been asked over the years!
WHAT IS A TITLE?
The title is a legal term that says you have the right to use your property. It will also have limitations on how you can use that property. The goal here is to always have a clear title (with no "clouds") on the title to make sure you are not inheriting existing debts or liens.
WHAT IS A TITLE SEARCH?
A title search is a search done on the public records (those at the courthouse). It is done to uncover any defects on the title or to uncover any issues that could limit your right to use the property. If an issue is found, your closing attorney, Buyer Agent, Seller and Listing Agent may have to work to get those taken care of before closing so that you can get what is called a Clean and Marketable Title (one that does not have those defects on them). This is needed so that when you go to sell the property in the future, you will have the right to do so! After the title search, and after any defects (or "clouds") on the title have been taken care of, the closing attorney will then issue a title policy!
IF A TITLE SEARCH WAS DONE - AND A TITLE POLICY ISSUED - WHY DO I STILL NEED TITLE INSURANCE?
There are a lot of issues that can come up after you close on the house that a title search could not have found. Here are some examples:
- The home seller sold you a home that they didn't really own - turns out that they were renters posing as the seller (this is fraud)!
- The seller of the home you are purchasing had purchased the home with a brother about 10 years ago, but the brothers haven't talked to each other since then and the current owner does not know he needs the other brother's signature in order to sell the home to you.
- The seller of the home you are purchasing is a single woman. However, when she purchased the home she was married and has since been divorced. She doesn't realize that her ex-husband still co-owns the property and needed to sign off on the sale - but hasn't!
- The seller of the home you are purchasing might have inherited the house under the terms of a will. But, it turns out, the will was out of date and a more recent will left it to someone else! That someone else is not the person who is selling the home to you!
WHAT HAPPENS IF A LONG LOST RELATIVE TURNS UP AFTER YOU CLOSED ON THE HOUSE?
But what happens if the court decides that the long lost relative is the true owner of the house? Although the lender policy will reimburse the lender for what they will be out if you now no longer own the property (which would be the amount you owe on the mortgage), you also have invested in the property - you put a down payment on the house, you made mortgage payments on the house, etc. A lender policy will not cover those losses - but an owner's policy will cover your losses.
ISN'T OWNERS TITLE POLICY LIKE HOME TITLE LOCK?
Many buyers tell me that they hear the commercials about Home Title Lock and want to know why it wouldn't be better to get that policy instead of an Owners Title Policy. But there are big differences between an Owners Title Policy and Home Title Lock. Home Title Lock is nothing more than a monitoring service - they will monitor your title documents and alert you to any changes. If anything happens and you need to rectify or correct anything, they will have "experts" available to help you. I don't know how much the experts charge for helping you resolve any title disputes, but if you have an Owners Title Policy, you definitely don't need Home Title Lock.
WHAT HAPPENS IF I DON'T HAVE AN OWNERS TITLE POLICY?
If an issue occurs with your title and you don't have an owners title policy, you could lose everything you have invested in the property or face expensive costs to mend the title issue.
As you can see, title insurance is an extremely important aspect of buying a house! If you are paying cash, you are not required to get title insurance, but if title defects come up after closing, there may be a very expensive cost to resolve those issues. For most people, buying a home is typically the most expensive investment most of us make. If you want to buy with confidence, you should definitely get owners title insurance to protect your home from legal and financial claims.
And if you are considering purchasing a home in 2024, and have questions on the home buying process, feel free to reach out and let me know how I can help! Don't forget to take a look at my latest video on Why Title Insurance is a good investment!
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