What You Need to Know About Title Insurance
October 29, 2018
As the cost of buying a home continues to increase, some homebuyers look for ways to cut costs. Adding more than $1,000 to the typical buyer's closing costs, title insurance can be one expense some buyers consider putting on the chopping block. But that's not possible when it comes to a lender's title insurance policy, and not worth the risk when it comes to an owner's policy. Even in 2018, title insurance remains a necessary expense that can pay for itself many times over.
What Title Insurance Does
Like other closing costs and associated fees, taxes, and charges, obtaining title insurance is part of buying a home. Title insurance protects the title to your home, that is, your legal rights to own, possess, use, control, and dispose of your land. The benefits last long after you've settled into your new place. Title insurance differs from other insurance products you may have purchased. While an auto policy will protect you from a possible future accident, title insurance protects against any previously undiscovered issues that surface only after you've closed on the home. Examples of such issues include clerical errors on documents, property record mistakes, or liens due to unpaid taxes or construction bills. If you're like many folks, a house will be the biggest investment you'll ever make. Problems like unpaid taxes or ownership claims from a previous owner's heir are not only legal headaches, but they could also jeopardize your entire property investment.
What Title Insurance Doesn't Do
Title insurance provides great peace of mind that past problems won't come back to haunt you. However, it's worth emphasizing that title issues, like taxes, construction bills, and so on, that are under the buyer's control, remain the buyer's responsibility. Policy coverage extends backward through time from the date of closing. This is different than many other types of insurance that protect against new problems that come up in the future.
How Lender's and Owner's Policies Compare
One of the most confusing aspects¬†of title insurance is the two types of policies. They're often bought together, but lender's and owner's policies are quite different. A lender's policy is required for any home purchase involving a mortgage. As the name suggests, the lender's policy covers the lender's interest in the deal for the amount of the loan. This type of policy is required for both purchase and refinance transactions. Since a lender's policy doesn't protect the homebuyer's interest in the property, title companies offer owner's policy coverage to protect your purchase investment. An owner's policy isn't required by law, but it's highly advisable.
What to Expect from the Process
Buyers today can look forward to a fairly streamlined process when it comes to purchasing title insurance. That's because most lenders take the lead in selecting a title insurance company for the transaction, even in the case of for-sale-by-owner (FSBO) purchases, although buyers always have the option to shop around for another company. A two-part process gets started shortly after your offer is accepted. As your lender begins processing your transaction, the title company will be contracted to conduct a thorough title search, where past property records and tax records will be researched. Title companies search for any previously undiscovered problems so that such issues can be addressed before you close on the house. After the title search is completed and any pre-existing issues are identified and resolved, the company issues the policy or policies, and the sale can proceed. Your mortgage lender retains the required lender's policy, and, if you opt to buy it, you'll take possession of the owner's policy at closing.
How Title Insurance Premiums Work
Title insurance premiums are paid at the time of closing and are included in the list of third-party closing fees. While regulations differ from state to state, the homebuyer is typically responsible for the lender's policy, while the seller often pays for the owner's policy. Title insurance premiums again differ from other types of insurance, in that there is only a one-time premium to pay at the time of closing. That fee insures the lender's policy for the life of the loan, until it is paid off or refinanced, and insures the owner's policy for as long as you own the home. Costs vary, but typically range from $1,000 to $3,000.
Why Title Insurance Is Vital
Despite the expense, title insurance is still one of the most important purchases you'll make when you buy a home. Big problems are rare, but they do come up, and without proper protection, your entire home investment could be at risk. The beauty of title insurance is that this one-time expense can protect your investment for decades to come and for as long as you live in your home.