What Is Title Insurance and Do You Need It For Your Home?
Title insurance is insurance that protects the title holder against liens or other claims on the title of a property.
Liens aren't direct claims of ownership over the property, but it is a cloud on the title--meaning a right to claim or sell the property until a debt is paid.
For example, a mortgage or unpaid property taxes are two classic examples of liens that can be put on a title.
When you purchase a home, you are looking for a clear title so that no one else can come out of the woodwork and claim the right to the property.
There are two different types of title insurance: lender’s title insurance and owner’s title insurance.
Lender’s title insurance is a requirement when purchasing a home, while owner’s title insurance is not.
Understanding more about title insurance will help you decide if you need the owner’s title insurance or not.
What is Lender’s Title Insurance?
As the title suggests, lender’s title insurance protects the lender by ensuring that there are no liens on the title to the property.
Title insurance also protects the lender against fraud, false ownership claims of your property, documents not recorded properly, and more.
The amount of this one-time cost depends on the loan amount and only protects the lender, not the property owner.
Before lender’s title insurance can be purchased, a title company will perform a title search.
This search will turn up any open liens against the title.
A survey will then be needed to ensure there are no issues with the property’s boundaries.
What Is Owner’s Title Insurance?
Owner’s title insurance protects the homeowner if someone sues the owner for a claim that happened before the homeowner purchased the property.
These claims can stem from the last owner’s neglect to pay off certain costs such as construction projects or taxes.
If later you find out that the title wasn’t as reported, your title policy will cover the loss up to the policy’s face amount.
Owner’s title insurance is also a one-time fee, generally paid at closing.
This type of insurance works more on preventing risk since the title search will reveal if there are any issues with the property before purchasing.
Do You Need Title Insurance?
While owner’s title insurance is not a requirement, it can be detrimental if someone files a claim.
Title insurance will give you peace of mind knowing upfront if there are any liens or ownership claims on your property.
Without title insurance, you may be held reliable for fixing any legitimate issues.
When Do You Purchase Title Insurance?
Normally, title insurance is acquired once the title search is complete. Coverage begins from your closing date or when the title is legally transferred to your name.
If you are using a real estate attorney to complete your transaction, the title search is something your lawyer's office usually procures with a title agency.
Because this is a normal part of the services attorneys performs for real estate transactions, they may not ask you if you have a preference for the title agency.
If you don't have one in mind, it's okay because your attorney will most likely have contact with agencies that can provide these services.
You can also speak to your attorney about purchasing insurance from your preferred title insurance company.
What Is a Title Search?
A title search will let you know if there are any previous claims against the owner’s title.
This includes any outstanding payments due to third-party companies such as contractors.
These issues may have been overlooked if it wasn’t for a title search, which is why lenders require this as part of the mortgage process.
What Is Covered Under a Title Search?
Title searches are important to help you uncover any potential issues with your property’s title, but these searches can’t cover everything This is because not all risk factors can be disclosed by reviewing public documents.
Besides protecting you against losses from covered claims, title insurance also covers legal fees and protection for any future claims.
Some items that a title search may not cover include:
Can You Purchase Extended Coverage?
The American Land Title Association, otherwise known as ALTA, can provide you with extended coverage for both owners’ and lenders’ policies.
These coverages provide an in-depth research process, such as performing an inspection of the property.
Extended coverage can give you access to “off-record” information such as:
- Conflicts regarding the property’s boundary lines
- Unrecorded liens
- Unrecorded third-party claims/rights
How Do Title Searches Work?
The point of a title search is to turn up any public records for the property you are about to buy.
Several different legal documents may be used by a title company or attorney to reaffirm that the seller is the actual owner.
The company or attorney you hire will research public records for any important documents regarding your property.
The point of finding these documents is to prove who the owner of the property is and to see if there are any claims on the home.
There will be several documents that will go under review to make sure there is a clear title. These sources include:
- Bankruptcy filings
- Death certificates
- Marriage licenses
- Divorce cases
How Long Does a Title Search Take?
The amount of time varies when it comes to completing a title search.
The determining factor usually relies on how complex the supporting documents are.
Another situation that can delay the process is if it takes the office a while to find the documents you request.
It is important to know that the older the property, the longer the process will take.
This is mostly due to the property having an extensive history rather than that of a new house.
For this reason, a title search on a new house will typically be done faster than an older one.
How Much Does A Title Search Cost?
The typical cost of a title search will cost you anywhere between $75 - $200. However, the price varies depending on where you are buying property.
This cost includes an easy-to-read report outlining any potential issues you could face.
Performing the title search yourself will cost less upfront but could cause you to owe more in the future.
Having a clear title history is extremely important and is worth the cost of hiring a professional.
How to Save Money Without Sacrificing Quality
If you know that the property’s title was insured recently, you may qualify for a discount.
Most title companies are willing to give a discount since they rely on the fact that the title has been researched up until you took over.
Searching for title insurance after recently purchasing a home can save you a substantial amount of money.
You may also be eligible for a discount if the home was sold recently before you bought it. Check with your title insurer to see if these discounts apply to you.
Who Does the Title Search?
Usually, your attorney or title agency will perform the title search. However, you can choose to do it yourself or have your lender do it.
If you decide to do the title search yourself, you will have access to public records via your county’s courthouse, assessors office, or recorder’s office.
However, if you are unfamiliar with reviewing legal documents, you may want to leave this to a professional.
What Is an Abstractor?
The person performing the title search is also known as an abstractor.
The role of this job is to find any pertinent information and/or documents regarding the property.
Once they have this information, they can create an abstract of a title, including a chronology of all purchases and documents.
What Does a Title Agency Do?
A title agency plays a crucial role during real estate transactions, so it is important to choose a well-regarded company.
To hire a trustworthy title agency, you must first understand what they do.
Title agencies invest a rigorous amount of hours into researching records to uncover any problems such as public liens or ownership claims.
A title agency will gather information via public records and will compile it into a title insurance agreement of preliminary report.
How Do You Pick the Best Title Agency For Your Home?
With so many title agencies out there, how can you narrow it down to one? Consider the following factors for finding a title agency.
When picking out a title agency, go for one that has years of experience and good reviews.
As mentioned above, check reviews to see what other customers think. See if you can get any recommendations from any trustworthy friends or relatives.
No matter how good a title agency may be, it still needs to fit into your budget. Ask your potential title agency what their closing fees are as well as their pricing structure.
Choose a title agency within a driving range you feel comfortable with.
You will need to commute to the agency several times to show identification and sign documents.
Save yourself frustration and time by choosing a nearby agency.
What Are the Pros and Cons of Owner’s Title Insurance?
In case you are questioning whether or not you should purchase title insurance, consider the following pros and cons.
What Are the Pros and Cons of Owner’s Title Insurance?
- Owner’s title insurance will cover legal fees in the event someone sues you.
- You will receive protection from any errors prior to your ownership such as surveying errors.
- Lenders’ policies decrease in value over time, but an owners’ policy remains until the owner no longer owns the property.
- The cost can be expensive - even with a discount.
- There is a low chance that someone will file a claim against your title.
- Avoid buying owner’s title insurance if you own a new home. There are no previous owners and a developer will make sure there is a clear title before investing in the property.
Title Insurance is a Must For Full Protection
You are ultimately purchasing owner’s title insurance for peace of mind.
If you own a brand new or relatively new home, then there is not much sense in purchasing an owner’s title insurance.
However, there are some situations where purchasing owner’s title insurance may be necessary.
If inheriting a home where this is a messy situation with the will, purchasing title insurance will offer a layer of protection.
It may also make sense to purchase an owner’s title insurance if purchasing an older home that may have had renovations done without payment.