Buying a home is a big investment and one that takes careful planning and organization. You want to be sure you are buying the best home for your money.
It's the reason you hire a real estate agent to guide you through the home search process. It's the reason you have a home inspector go through the property with a fine-tooth comb. You hire a mortgage broker or go to your trusted financial institution because you want their expertise.
One part of the process that might surprise is the requirement to get title insurance. What is title insurance and why do you need it?
Read on to learn what you need to know about title insurance when you're buying a house.
What Is Title Insurance?
Title insurance is a type of insurance policy used to protect you and the mortgage company. This insurance is different from other types of insurance you might get, like auto insurance or homeowners insurance.
Typically, when you purchase an insurance policy it protects you against possible events that might happen in the future.
Title insurance is different in that it protects you from things that have potentially happened in the past with the property you are buying.
When considering title insurance there is both lender's title insurance and owner's title insurance. The lender's title insurance protects the interest of the lender, mortgage company or bank. While the owner's title insurance will protect the homebuyers interest in the property purchase.
Typically, the lender will require the homebuyer to get title insurance and it is covered under part of the closing costs.
Title Insurance Lingo to Know
To understand how title insurance works, it's important to understand the terminology associated with getting title insurance. Let's take a closer look at some verbiage you should know.
The title is the legal document that is issued when you purchase a property. It has the legal description of the property in question.
Title insurance is the insurance policy that protects your rights and the rights of your lender if there is a dispute related to the property.
Owner's Title Insurance
The owner's title insurance is issued to the homebuyer. As the policyholder, you're also named as the beneficiary. The policy protects you if there are claims made on the property after the house title is transferred to you.
Lender's Title Insurance
The lender's policy, sometimes referred to as the loan policy, protects the lender who has a financial interest in the property. It offers them protection from possible financial loss if there are claims made on the property after the sale is complete.
The title search is done before the title transfers from one owner to the next. It checks the legal ownership of the property. The goal is to identify anyone who might have a legal claim on the property. it also would identify, hopefully, anyone who might have a right to use the property.
Title defects help to identify through the title search and issues or threats that might be made on the property. By looking at anyone who might have a financial or legal interest in the property, the title search can identify potential defects.
An encumbrance would identify any possible limitation on the property getting purchased. An encumbrance might include things like a zoning law issue, an existing lease on the property, or easements or encroachments that exist on the property.
An easement gives another person the right or access to use a part of your property. An example might include a utility company might have an easement on the property. It gives them the legal right to use the property for a specified purpose, yet it doesn't mean they have any ownership right.
Encroachments happen when something spills onto the property being purchased. This might include a fence, stand alone building or even a driveway. Encroachments can make property issues tricky and should be avoided if possible.
How Does Title Insurance Work?
The title insurance works similarly to other insurance policies you might be familiar with. If an issue arises with the title on the property you have purchased, the insurance company will work to address the issue.
They might investigate to see if the issue in question is legitimate. They might fight the issue in the courts on your behalf or the lender's behalf.
If they can't resolve the issue, they would be responsible for compensating you accordingly.
What Does Title Insurance Cover
There are several areas that are typically covered under title insurance.
One thing the insurance protects against is any unknown liens on the property. The previous owner may have had a lien put on the property that didn't show up on the title search. This might be for unpaid taxes or unpaid child support, for example.
Often property passes from one person another through a will after someone dies. If there was an heir that was omitted when the property was inherited, they might show up wanting their portion of the property. In fact, it would be considered they still have some legal ownership in the property. The title company would need to resolve the ownership issue.
Mistakes happen and title insurance protects against possible errors in the public record.
There also could be a potential issue related to fraud. If the property was previously bought or sold fraudulently, the insurance protects against this.
Cost of Title Insurance
The good news about title insurance is that it's a one-time cost. Typically, the lender's insurance is slightly less than the owner's title insurance.
Lender's insurance is usually included in the closing costs paid at the time of the closing on the property.
The other part of the good news is that while you only pay once for the policy, it is good for the whole time you own the property. Most lenders require title insurance, while owner's insurance can be optional.
Understanding Title Insurance
Buying a house is certainly exciting. Yet, it comes with some risks too. Understanding what is title insurance works to eliminate some of those associated risks that come from the history of the property.
If you have questions related to your property purchase, or need a real estate lawyer for a closing or to look at your title insurance issue, we can help. Contact us today so we can answer your real estate related questions.