It's finally done. You’ve spent weeks making offers, counteroffers, and submitting endless amounts of paperwork. You’ve finally closed on your new home, you’re finally a homeowner. There is no feeling like closing on your first home! You’ve unpacked the boxes and have made your new house feel like home when you a phone call. It’s a phone call from someone who says they are the rightful owner of your new home. You come to find out that the seller was using forged paperwork to sell a house they did not own. The worse news is that legally, you don’t own the home either.
This may seem like a pretty far-fetched story but over half of all real estate transactions have title-related problems. With title insurance, you can avoid a disaster like this. New homeowners sometimes have a hard time understanding why they might need it which is exactly why we wanted to write this easy to understand guide to title insurance.
Some key terms to know before we get started.
Title: A title is a document that proves an individual legally owns a property.
Escrow: Escrow is the period where a third party (such as a title company) holds the funds for the home sale until the transaction is ready to be completed.
Title search: During escrow, the title search is conducted to find mishaps in past titles for the property.
Lien: If an individual owes money to someone else, that person (the lienholder) can become the owner of the debtor's property until the debt is paid.
Title Insurance Basics
With one important distinction, title insurance isn’t all that different from other types of insurance: Title insurance protects you from events that happened in the past versus events that might happen in the future. Title insurance protects your ownership rights from issues in the past titles on the home, such as improperly filed paperwork. In contrast, homeowner’s insurance covers losses that could occur from disasters in the future, such as floods or fires.
Lender’s vs Owner’s Insurance
Now we are going to look at the differences between the lender's insurance and the owner's insurance. The owner’s insurance protects the party purchasing the home from issues that may arise, even after a title search. The price of the policy is based on the total cost of the home itself, not the loan amount. Your policy is valid for as long as you own the home. You pay a one time title insurance fee upon closing.
Lender’s insurance, however, protects the party issuing the mortgage loan(i.e. the bank). The policy cost is a percentage of the loan amount, not the price of the home. The policy will drop as you make mortgage payments and the policy will end when the loan is paid off.
Do you need title insurance?
The owner’s policy(the policy that protects you) is optional. However, virtually all lenders require a policy to protect their investment. An insurance company may offer discounts for purchasing both lender’s and owner’s together, there is no requirement to purchase and owner’s policy in addition to the lender's policy.
We know what you’re thinking - why even bother paying for an owner's policy if it’s not required. You’ll recall from earlier that your lender’s policy only covers the lender’s investment - the value of your loan. This means that the total value of the house isn’t covered, so an owner’s policy is a small price to pay for protection for your investment as well.
The Purchase Process
A title search is conducted by an attorney before the policy is issued. Any issues that are found will be brought to the attention of the seller and it is the responsibility of the seller to resolve these issues. Once your search is is complete and the issues are resolved you’ll be issued a title insurance policy will guarantee three things: 1) The insurance company has your back for any mishaps that may occur in the future, as long as they don’t exceed the cost of your home and are within the terms of the policy, 2) any title problems were resolved and accounted for by the policy, and 3) a title search was completed as thoroughly as possible.
What exactly does my policy protect me from?
Here are some common scenarios that a standard policy may cover.
Fraudulent sellers
Forged documents
Unknown heirs
Certain problems missed during a title search
Improperly filed documents
Here are some scenarios that your policy will not cover.
Boundary line disputes
Zoning problems
Environmental protection laws
Issues are known to the buyer, but off public record and unknown by the title company
Post-policy claims
If you have any questions about what your policy covers, ask your insurance company. Make sure you ask your questions
To ensure that your policy covers what you think it does, make sure that you read the fine print before signing on the dotted line!
Clearing up some common misconceptions
You are not required to buy insurance from your real estate agent or the lender’s recommended insurance company. You have the freedom to shop around to find a policy that works for you and fits into your budget.
Remember that title insurance only covers you for events that happen before purchasing the policy. Any mishaps that happen after you sign the policy agreement aren’t covered. For example, if you purchase the policy on August 31st, and on September 1st a lawsuit is filed, your policy won’t cover you. However, if the title search missed a publicly-accessible lawsuit,
So there you have it. Title insurance isn’t so scary, right? If have any questions about title insurance we would be happy to talk with you. You can give us a call or fill out the contact form by clicking HERE.
