What is title insurance?
Title insurance protects property owners and lenders against any loss they might experience because of liens, encumbrances or defects in title that should have been detected during a title exam. One example of a title defect is discovering improperly prepared or executed documents, such as an incorrect deed from a previous sale. Each title insurance policy is subject to specific terms, conditions and exclusions.
Does this insurance renew each year?
While other types of insurance are renewed each year, such as auto, homeowners or flood insurance, title insurance is paid one time when you buy a property. If you finance the property, there are actually two policies issued at one time, the Owner’s Policy insuring you, and the Loan Policy insuring the lender. Both policies remain in place until you sell the property or pay off the loan.
The issues addressed and insured
Title insurance covers future losses related to disputes over ownership, boundary lines, or a lien release. The title agent/attorney will obtain a title exam or abstract report to ensure the chain of title is up to date, that liens by past owners are paid and released, and that taxes/assessments are paid. A property survey will be analyzed for accuracy. The title policy protects you if any of these steps are mishandled.
The important of title insurance
Approximately 50% of all real estate transactions include a problem somewhere in the chain of title. Title agents/attorneys help to identify and correct these problems, enabling transactions to go through and allowing buyers to have peace of mind about their new home purchase. If an issue arises after the transaction closes, that should have been addressed, the agent or attorney will assist in a resolution.
Deed preparation and transfer
Title agents or attorneys may provide deed preparation of transfer services for parties seeking to add or remove a property owner, at closing or in the future. Transfers are often necessary to remove a former spouse or family member previously on title. There are also instances when owners desire to transfer property into a Trust. Deed transfers on mortgaged properties are restricted, seek legal counsel.
Sale by owner
Title agents or attorneys often handle property sales where neither party, buyer or seller is represented by a real estate broker. Private property sales are best handled by a title expert to ensure ownership transfers are prepared and recorded accurately, that liens are released and taxes paid, etc. All funds should be handled by the attorney/escrow agent to ensure proper disbursement.
Pay One-time for Owner’s Coverage
The Other Insurance Policy Every Homeowner Needs
In the wake of 2017’s destructive hurricanes, floods and fires, homeowners are more aware than ever of the importance of having adequate homeowner’s insurance and possibly flood insurance to protect their investment. But another insurance policy – title insurance – is just as essential and less costly.
Title insurance, according to the Consumer Financial Protection Bureau (CFPB), protects your lender (and you, if you purchase your own coverage) against a legal claim about your property. For example, a contractor for a previous owner could place a lien on the property or a long-lost relative of a previous owner could come forward with a claim of ownership.
Unlike other types of insurance that you usually pay through monthly, quarterly or annual premiums, title insurance is purchased with a one-time premium paid at the closing on your property. While the lump sum may seem expensive, Stewart Title points out that if you estimate how long you own the home, your annual or monthly expenditure would be much lower than homeowner’s insurance.
Lender’s title insurance and owner’s title insurance
Homebuyers must evaluate whether they need two separate title insurance policies. Your lender will nearly always require you to pay for a lender’s title insurance policy. Just like it sounds, this policy only protects your lender, covering them for losses not to exceed their loan to you. If you do not buy an owner’s policy and someone sues you over a claim on your property, you would still be responsible for paying legal fees and possibly paying the claim if a court decides it’s valid.
Shopping for title insurance
Title services are one of the services associated with a home purchase that you can shop for and potentially save money. The CFPB points to research that says consumers can save as much as $500 on title services by shopping.
To start shopping, ask your lender and your real estate agent for recommendations for a title company. Then ask friends and family in your area for recommendations and search online. Some title companies post their fees directly on their website, which makes it easier to comparison shop. If you’re buying a home and the seller is paying for your title insurance according to the closing cost terms in your contract, you may not be allowed to shop as the seller or their real estate agent may select the title agent or closing attorney.
If you’re paying for title insurance, identify a few title service providers, ask them for a price quote and references. When you contact the references, ask them how responsive the company is and whether they had problems.
A significant issue in recent years is fraud and identity theft, sometimes associated with the transfer of funds during a real estate transaction. Ask for advice about how to protect yourself and what the title services provider is doing to prevent fraud. Never wire funds to anyone based upon an email request. Call your title agent directly to verify wiring instructions at closing are valid. Any wiring communication from your lender or title agent should come to you via secure email and require a user I.D. and password to open and view data.
Discounts: Ask if discounts are available for your insurance policy, which may include:
- Discount for buying lender’s and owner’s title insurance from the same company.
- A reissue or renewal rate could be an option if the seller’s title insurance policy is relatively recent and the sellers are willing to provide you with the name of their title insurance company.
- Reissue credits for an existing owner’s policy when refinancing your mortgage loan.
Title insurance offers one of the best types of financial protection: something you pay for once and forget about, but is invaluable when needed.
Why you need it before you close
You may have secured a mortgage for your new home at a good rate, had an inspector give it a clean bill of health, and gotten over any buyer’s remorse about taking on your new big investment.
Time for a sigh of relief? Not yet. The last thing you want to do is spend more money on something you can’t see, but if you didn’t have a title search on your new home, it’s important you have title insurance before you close. Insurance can be costly, but as most of us know because of automobile, health, and home insurance, it’s more costly not to have it in place when it’s needed.
A title search prior to closing can allow you to walk away from the deal if the search reveals an intractable title problem, says attorney David Reiss, a professor of law and Academic Program Director, Center for Urban Business Entrepreneurship, at Brooklyn Law School in Brooklyn, N.Y. After the closing, title insurance will take care of any claims that are covered by the policy such as those relating to contractor or mechanics liens, unpaid mortgages, encroachments, or easements that affect your ownership of the property.
Truth be told, most buyers don’t purchase a home by paying cash, they turn to a mortgage lender or bank. And most lenders require a title search and insurance to protect their investment, Reiss says. Certain types of house purchases may make it difficult, however, to conduct the search and buy the insurance, namely a home purchased after a foreclosure or through a court sale, he says.
Without title insurance, the result can be hundreds, if not thousands, of dollars, if there are balances owed on prior mortgages, unpaid taxes, and liens that nobody knew about at the closing table, says Ben Niernberg, EVP of Business Development & Operations at Northbrook, Ill.-based Proper Title, LLC. “The insurance guarantees the deed to the home is being sold by the correct person so no one else can claim it,” he says.
In fact, it may be wise to order a search as soon as possible to avoid having problems at the 11th hour. The buyer should make the purchase contingent on a clean title search, Reiss says. The process of conducting a search is straightforward. An agent of the title insurance company will search the public records related to the house and property, including land records, judgment liens, and violations to see if any there are any title defects, Reiss says.
The time table to correct an issue varies according to the issue, and some can be rectified in an hour while others take weeks or months, Niernberg says. Easement issues typically are corrected fairly quickly while mechanics liens may prove difficult and time consuming, he says. If issues arise with deeds connected to wills or deaths, these, too, may take time and again, another reason to do the search before closing, Niernberg says.
The cost of conducting a title search and buying the insurance policy vary by state, but should never be a deterrent, given the enormity of most home purchase investments. In Illinois, for example, the fee to conduct the search is $250, which covers any outstanding liens or other potential claims on the property. (A chain of title that searches back to the last known title policy is usually about $250.00, Niernberg says.)
The largest cost of this process is buying the actual policy or title insurance. The amount is not a percentage of the value of the house, but determined by the underwriter based on a number of variables, the same as with insurance policies for cars, health, or the home. With title, this involves the sales price. A policy on a $350,000 home might be $1,995, for example, or $2,340 for a $500,000 home, says Niernberg.
But once you have the title policy in hand, you finally can heave a big sigh of relief.
Barbara Ballinger is a professional writer, author, blogger and speaker who has long focused on real estate, design, and personal finance. She has co-authored many books, including Successful Homebuilding and Remodeling, The Kitchen Bible: Designing the perfect culinary space, and The Garden Bible: Designing the perfect outdoor space. She regularly contributes to the National Association of Realtors® Website and magazine.
Margaret Crane is a nationally known freelance writer, blogger and journalist who has co-authored with Barbara Ballinger several books and articles on real estate, design and family business. Her byline has appeared in Realtor® magazine. With more than a half-dozen titles to her credit, Margaret’s latest design book is The Kitchen Bible: Designing the perfect culinary space.