Title Insurance

Learn exactly why you need insurance when closing your home.

As part of the mortgage approval process, mortgage lenders require home buyers to purchase title insurance for the lender. Title insurance protects the lender from disputes over ownership and establishes who has a right to own the property.

When ownership of a property is transferred from one owner to another, this is called a transfer of title. This transaction is then entered into public archives. Title insurance companies will do an exhaustive search of public records to ensure the title’s legitimacy and therefore, its ownership, is not in question. This is called a property title search.

In a property title search, the title company examines the chain of ownership carefully. The most common types of title insurance claims include errors of public record, undiscovered liens, omitted heirs, and fraud. In a perfect world, the person selling you their home has what is called a “clear title.” This means they own the title free and clear of encumbrances.

Title insurance protects the lender from litigation over property ownership disputes down the road. In addition to the required title insurance to cover lenders, buyers can also purchase owner’s title insurance for themselves.

Unlike lender’s title insurance, owner’s title insurance is optional. This type of title insurance offers the buyer protection on the status of ownership the same way it protects lenders. You don’t want your homeownership to be at risk because there’s a dispute with a lien from a previous owner.

If the buyer purchases owner’s title insurance in addition to lender’s title insurance, he or she is also protected from potential title issues. There are a number of different title issues that could arise, such as:

• Missing Heirs or Undiscovered Will

When a person passes away, they may leave property to their heirs. If a heir is missing, and then found years later, your property ownership falls into question. There may also be no will, or the will may still be undiscovered at the time the property is sold. Property ownership would later be settled in a legal dispute, costing you time and money.

• Undiscovered easement

An easement is a part of your private property that may also legally be a pathway for public use. There are several different types of easements such as utility or sewer maintenance easements, and Homeowners Association easements. If you are unaware of easements on your property at initial purchase, and later discover something that devalues your home (such as a sewer line being installed without your permission), you could lose money.

• Impersonation

In the closing process, a person could present false identification and lead you to believe that they are the seller when they are not. In this instance, they have no right to sell you the home since they are not who they say they are.

There are several different kinds of liens that could prevent you from getting a clear title to the home: consensual liens, statutory (or non-consensual) liens, construction liens, or tax liens. These liens might be for non-payment to contractors who have done work on the home, tax money owed to the IRS, delinquent property payments or past-due spousal support.

• Errors in public record

A clerical error or filing error could lead to difficulty securing a home loan. For example, the wrong square footage of a home could be listed, and this discrepancy could affect how much a mortgage lender is willing to loan you for your home.

The buyer has a legal right to select their title insurance company. According to a law called RESPA, sellers cannot mandate the use of a certain title company *unless* they are covering title insurance costs as part of the closing agreement. RESPA, the Real Estate Settlement and Procedures Act, “...prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.”

However, as part of closing agreement negotiations, the home buyer may end up working with the seller to establish who selects the title company. This usually determines who pays for the title insurance required by the lender.

A good place to start when selecting a title insurance company and specific title agent is to get a referral from your realtor. Realtors in particular cultivate partnerships with certain title agents. Title agents may have previously worked with your realtor and distinguished themselves from others in their efforts to do a thorough title search and complete the closing process in a timely fashion.

Title insurance costs depends on the purchase price, loan amount and state, usually around $1,000, but may cost you as much as $4,000 depending on where you live and the home’s purchase price. The cost of title insurance is a one-time payment - there are no recurring fees. Much like the value of your home, your credit and your loan amount can also influence how much your title insurance costs. Research your options and get at least two different quotes from title companies. You’ll notice some companies will bundle lender’s and owner’s title insurance together, leading you to believe that the owner’s type of insurance is required - it’s usually not.

There are actually two types of title insurance: one for the lender, and one for the buyer. In addition to the required title insurance to cover lenders, buyers can also purchase owner’s title insurance for themselves.

Unlike lender’s title insurance, owner’s title insurance is optional. This type of title insurance offers the buyer protection on the status of ownership the same way it protects lenders. You don’t want your homeownership to be at risk because there’s a dispute with a lien from a previous owner.