What Is the Purpose of Title Insurance?
June 9, 2017
It's a crucial question to answer during the homebuying process: What's the purpose of having title insurance anyways? To the uninitiated, it's easy to get the impression that a title insurance policy is a nice perk, an extra. However, a title policy is, in fact, one of the key homebuyer legal documents. Not only does it secure the buyer's investment in the purchased property unlike any other type of insurance, but it also takes on a central role in the mortgage lending process.
Insuring the Past
Most insurance protects against problems that could happen in the future. Title insurance protects homebuyers from problems in the past. This is unlike almost any other type of insurance product and a key detail to understanding what you're paying for when you buy a title insurance policy. Buying a home is one of the single biggest financial investments there is. Imagine finding out that a seller didn't have a legal title to sell the property, or that a decades-old legal problem exists that even the seller doesn't know about. It's easy to see how these kinds of issues, known as "title defects," could throw a wrench in the works if they aren't found before a buyer closes on a home. Enter title insurance.
Buying With Confidence
Title defects have been a concern since the first property owners started buying and selling land. As the real estate industry matured, title insurance companies emerged, and since the 1870s, have promised to protect buyers against losses from defective titles, liens, and other encumbrances so that they can buy with confidence. Beyond some obvious technological advances, the story is much the same even 140 years later. Modern title insurance policies protect the homebuyer and their property investment from some potential title defects, including
- Claims that someone else is the real legal property owner.
- Claims of an easement through your property.
- Unpaid construction liens against your property.
- Title defects from fraud or paperwork errors.
Eliminating Risk Before Closing
There's another big difference between title insurance and other types of insurance. Namely, how title companies approach these potential defects. Whereas auto insurers may make a future risk assessment and charge policyholders accordingly, a title insurer looks to eliminate their risk entirely. This is possible since title insurers are dealing with a concrete past and not an uncertain future. By the time a homebuyer sits down at the closing table, a title insurer will have certified that the seller of the property has the legal right and title to make the sale. Title insurance companies review government records and legal documents looking for common sources of title problems, like record errors, fraud, forgeries, conflicting wills, missing heirs, construction liens, easements, and more. This process all takes place between acceptance of an offer and the closing date. Usually, things go smoothly and a title policy can be issued. When typical title defects are found, they are "cured" during the process, and a policy is issued after the risk has been eliminated. If more serious questions come up, then the title company contacts the buyer.
Securing the Property Investment
Unlike car or health insurance policies that have a monthly premium, title insurance buyers pay a one-time premium at closing for their policy. Depending on the property, type of sale, and legal requirements, a title policy costs homebuyers anywhere from a few hundred dollars to more than a thousand dollars. This is a small price to pay for the peace of mind that the buyer's new home investment is fully protected. In addition to protecting against title defects, most policies also cover legal fees if a claim is made against the property. However, title insurance claims are relatively rare, with industry statistics showing around five percent of premiums being paid out for claims, as opposed to other types of insurance where the rate is much higher.
Choosing a Title Policy
The last detail potential homebuyers should be aware of when it comes to title insurance is that there are two types of policies, each with their purpose. For buyers financing their home purchase through a mortgage lender, the purchase of a lender's policy will be required. This type of policy insures the lender's interest in the deal for the amount of the loan. This is good, but homebuyers aren't completely protected with just a lender's policy. That's why an optional owner's policy is highly recommended. The two policies are often bought jointly, for full protection, often local real estate laws dictate a buyer pays for one, and the seller pays for the other. The owner's policy insures the buyer for the full value of their home investment, including their down payment as well as the loan amount, and it stays in effect long after the mortgage loan has been repaid. In fact, the owner's policy insures the buyer and their heirs for as long as they own the property.