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Understanding Title Insurance

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Title Insurance

If you haven’t already heard of title insurance, you will as you close on the mortgage for your first home. Title insurance is one of many things your closing attorney will go over at the loan closing. While it can seem overwhelming buying your first home and going over so many closing documents at one time, it will help if you prepare ahead of time.

To help you prepare, we will tell you everything you need to know about title insurance so you can walk into your closing with confidence.

What is title insurance?

First, let’s talk about what a real estate title is. A title for a piece of real estate is simply a concept of property ownership, similar to a vehicle title. If you have the title to a property, that means you have legal ownership of that property.

Along with the title, there will be a deed which is a physical document that shows the transfer of the title (or ownership) from one person to the other. Once the mortgage closes, your new title will be sent to the mortgage company. Since this mortgage company has paid for your property, upfront, they will keep the title until you have paid them back. When you pay off the loan, the title will be sent to you.

The title or legal ownership of the property is very important when it comes to buying a new home or land. This is why you and the lender must ensure the title is clear, or void of any issues that might interfere with the transfer of ownership. This is where title insurance comes into play.

Two types of title insurance

Lenders title insurance: This is the most common type of title insurance and is required by most lenders before closing a mortgage. The lenders title insurance policy protects the lender against loss in the event there is an issue with the title. The lenders title insurance policy typically lasts until the mortgage is paid in full. Although most lenders will do a formal title search as part of the mortgage process to look for red flags, lenders title insurance gives them some extra protection against loss.

The bad news is that the cost of the lenders title insurance is typically the responsibility of you, the buyer. But the good news is that you may be able to negotiate for the property seller to pay all closing costs, including title insurance. 

Owners title insurance: This type of title insurance covers the owner in the event there is an issue with the title. Remember, lenders title insurance only protects the lender. That means if there is an issue with the title, the lender is protected from financial loss, but without owners title insurance, you are not. Owners title insurance is valid for as long as you (or your heirs) hold title to the property. Owners title insurance is typically optional and left up to you, the owner, to get if you want it.

What does title insurance cover?

If there is a dispute during the title transfer of ownership, title insurance comes into play to provide protection of financial loss. So, what kind of title issues should you be aware of? Here are some issues title insurance provides coverage for:

  • Filing errors
  • Title forgeries
  • Conflicting wills
  • Liens
  • Undocumented easements
  • Back taxes

What do these issues mean for you? Let’s say you purchase a new home and later find out there is a lien against the property for $20,000. There is a lenders title policy but you decided not to get an owners title policy. As the new owner of that property, you may be responsible for paying off the lien and any other fees associated with the issue. Any legal fees associated with this issue will be paid for by you. And in a worst-case scenario, you may even have to forfeit the property.

Now, let’s assume the same scenario happens but this time you’ve got an owners title policy. Your title insurance policy should cover the lien, your legal fees, and even compensation if you have to forfeit the property.

Needless to say, title insurance is an important protection against financial loss for both the property owner and the lender.

Do I need title insurance?

Title insurance is a wise choice for the purchase of any property, whether the property is vacant land or has a home on it. Even if you are not financing the purchase of the property and lenders title insurance isn’t required, you should still consider owners title insurance to protect yourself if there are issues with the title.

Lenders typically ensure the lenders title insurance policy goes into effect immediately upon mortgage closing. Owners who decide to get owners title insurance should do the same. The title insurance policy even covers title issues that occurred before the insurance policy went into effect.

How much does title insurance cost?

The cost of title insurance varies by a variety of factors including state, property location, property purchase price, and type of coverage. Title insurance policy costs typically range from $500 to $3,500.

In most states, title insurance companies set their own rates, and then it’s up to you to shop around. In those states, insurance rates are regulated to ensure that rates are not either too low or too high but rates can still vary significantly from company to company. There are also some states that determine what title insurance rates will be and everyone must charge the same rate.

How to get title insurance

When it comes to lenders title insurance, the mortgage company will begin the process of getting the title insurance soon after you’ve begun the loan process. Most often, they will choose the title insurance company. However, if you plan to also purchase owners title insurance, it may be worth mentioning that to your lender. If both policies can be purchased through the same title insurance company, you may get a better deal on both.

You can also choose to shop for title insurance on your own. There are four major insurance groups that dominate the title insurance market: Fidelity National, First American, Stewart Title, and Old Republic. These four groups make up close to 90% of the market. That doesn’t mean there aren’t others. There are. But this gives you a great place to start.

If you decide to shop for your own title insurance, start by requesting quotes from at least three insurance companies. When reviewing the quotes, be sure each company has quoted the same coverage.

Next, review the company’s financial strength on A.M. Best, their reputation on JD Power and Associates and the National Association of Insurance Commissioners, and ask for references from family, friends, and acquaintances.

Once you’ve made your decision, the insurance company will send over the policy for your review and signature. Be sure to communicate with your lender throughout this process to ensure you are meeting all requirements for closing.

Final Thoughts

If you are buying a home or property, title insurance is an important part of protecting yourself from financial hardship. Don’t forget that the title insurance you’ll pay for through your mortgage lender will most likely only be lenders title insurance and will not protect you in the event there is an issue with the title. To lower your risk of financial loss, consider an owners title insurance policy, too.

In addition to title insurance, homeowners insurance is another very important type of insurance you will need.Title insurance insures your title while homeowners insurance insures your home and your personal possessions. Homeowners insurance rates vary by state, company, property type, age of home, coverages selected and several other factors.

When deciding what types of homeowners insurance coverage you’ll need, be sure to consider the worst case scenario and make sure you buy a home insurance policy that will adequately cover your house and personal items and not leave you underinsured. Whether title insurance or homeowners insurance, the essence of insurance is to protect you from financial loss when the unexpected happens.

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