19 Apr Understanding Title Insurance
Title insurance is a type of insurance that protects the policyholder from financial loss resulting from defects in the title to real estate. Unlike other types of insurance, title insurance is a preventative measure against events that occurred in the past. If you buy a home and years later someone comes forward with a legitimate claim that they were never paid for a service rendered or never actually sold the property in the first place, that’s when the title insurance comes into play. It protects you against unpaid liens, claims and other encumbrances that may not have turned up in the original title search.
How it works
Title insurance companies first conduct a thorough title search in which various public records are examined. These records include federal and state records, deeds, court judgments, flood risk assessments and numerous other documents. Before issuing a title policy, the insurer may require that the homebuyer remove any outstanding liens and encumbrances.
The preliminary search report may reveal invaluable information to homebuyers in the early stages of a property transfer. It is important to review the document with great care, as any limitation and restriction on the property will be listed as an exception and therefore excluded from coverage by the insurer. These exceptions include use restrictions (such as requirements that the property be used for commercial purposes only), building restrictions (such as limitations on height, square footage and exterior appearance) and easements (such as a utility easement that may preclude some constructions to ensure utility lines are not compromised).
Standard risks covered under owner’s title insurance include false impersonation and forgery; fraud; errors in recording legal documents; incorrect legal descriptions; lack of competency, capacity or legal authorization of a party; improper recording of the deed; and undisclosed mortgage payments owed by the previous owner.
Types of title insurance
Lender’s Title Insurance – When you secure a mortgage, your lender will require that you purchase title insurance. This insurance, formally known as a “Loan Policy,” will only provide coverage to the lender. It is issued in the amount of the loan and decreases in amount as you pay down your mortgage.
Owner’s Title Insurance – The other type of title insurance, formally called an “Owner’s Policy,” is in most cases optional, yet highly recommended. Owner’s coverage insures the policyholder against claims to property as well as fraud and paperwork errors. The liability is typically issued in the amount of the real estate purchase price and lasts as long as the insured retains interest in the property.
Costs and how to save
Title insurance premiums are a one-off fee based on the price of your home or the loan amount, depending on the type of insurance you are seeking. In some U.S. states, the insurance premiums are controlled by insurance commissions, while in other states, the title insurance market is unregulated. If premiums are not fixed in your state, you will have more wiggle room to shop around and find companies that offer the best deals.
If you purchase the lender’s and owner’s insurances together from the same company, the company might offer you a discount. Make sure to inquire about other deals, such as those for senior citizens, first-time homebuyers and certain professions. If you aren’t sure what questions to ask, or would like additional information on this portion of homeownership, reach out to one of our experienced loan officers today!