While title insurance can often be included as a part of a mortgage agreement when a person buys a home, many people don’t actually understand what it is and how it can protect them. It’s usually a type of coverage that mortgage lenders will require you to carry.
Title insurance is a policy that covers the potential financial loss that results from property ownership. When a home is sold, either the home’s seller or buyer needs to pay for title insurance that covers the mortgage lender, whose money is purchasing the home on your behalf.
Often, at the time of sale, you might be asked if you want to take out an additional title policy as well. In order for you to make that decision, you need to know how title insurance works and what potential benefits having a policy offers you.
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How Does Title Insurance Work?
Buying a home can be a lengthy process, and part of the reason for that is homeownership comes with the potential for a wide variety of unexpected legal and financial consequences if any of the paperwork isn’t handled correctly. For that reason, mortgage lenders will insist on having title insurance in order to protect them from financial loss if something goes wrong during this process.
Homes that are being sold will be looked into by a “title research company,” whose responsibility is to determine if the person selling the home actually has complete ownership of the property. That is called having a “clear title.”
If the owner doesn’t have a clear title and sells the home to you, others with a legal claim to the home can cause you enormous financial headaches if the sale proceeds.
Ownership claims on a home can come in a variety of forms, including property liens from:
- The government, due to unpaid taxes
- Property liens
A lien means that the holder has the first rights to get repaid from the property owner, and money can’t go to a new lender before the lien is resolved.
If any mistakes or oversights are made while the status of a home’s title is investigated and a sale goes forward, a hidden problem, whether from undisclosed liens, currently pending lawsuits/legal judgments, or outright fraud, with the ownership of the home can result in numerous legal expenses and other financial losses.
Mortgages lenders don’t want to leave their profits (in the form of interest on your loan) in jeopardy and will make sure there is a title insurance policy that covers them.
What Types of Title Insurance Are There?
Before you can decide if you want to purchase an additional owner’s title insurance policy for yourself, you need to understand the differences between the two types of title insurance: lender’s policies and owner’s policies.
If your mortgage lender requires you, the borrower, to pay for the lender’s title insurance, that policy does not in any way protect you from financial loss. Though it might seem backward, you pay for a policy to protect the money the bank will potentially make off of you from this sale.
Although often these policies come with the guarantee that a title search has been done, that won’t mean much to you if an unexpected issue with the title’s “clean” status arises later on. On the other end of the sale, the seller will often purchase an owner’s title insurance policy to protect the future homeowner from financial loss.
These purchases are commonly part of the closing procedures of a house sale.
How Much Does Title Insurance Cost?
In comparison to how much financial loss from which these policies can protect both your mortgage lender, these policies are not prohibitively expensive.
Lender’s title insurance, which is generally mandatory for you to purchase for your mortgage lender, ranges between $500 to $1,500. The optional owner’s title insurance costs more, from $700 to $2,000, but, for the most part, this cost is the responsibility of the seller, so neither party will be paying the total insurance costs needed for everyone in the sale to be protected.
Do You Need Owner’s Title Insurance for Your Home?
If you’re preparing to buy a home, you should seriously consider the benefits of asking your seller and/or your lender to help cover the costs of owner’s title insurance as a part of their end of the closing costs. Even if they’re not willing to cover those expenses, owner’s title insurance can be well worth it.
This type of coverage will protect you from the costly financial losses that can result from problems with a home’s title after purchase, something that more than makes up for the roughly maximum $2,000 price tag.
What Title Insurance Plan Should You Choose?
In the event that you are in an uncommon position to pay for your owner’s title insurance policy when buying a home, make sure to shop around and compare different policies available to you.
Use online quotes, as well as information from realtors and real estate lawyers and lenders you trust, in order to help you find the appropriate policy.