What is Title Insurance and why do I need it?

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I find that many home buyers and borrowers lack a fundamental understanding about title insurance. While most past clients have admitted to briefly discussing the topic with their real estate agent, they don’t seem to understand its purpose or function–only that it will be an additional expense on the settlement sheet for which they are responsible.

What is Title Insurance?

Title insurance provides coverage for certain losses in the title that may have occurred prior to your ownership. It protects against claims resulting from various defects such as prior fraud or forgery that might go undetected until after closing, including liens, encumbrances, and defects that were unknown when the title policy was issued and may possibly hurt your ownership or investment.

What protection am I receiving with a title policy?

A title insurance policy contains provisions for the payment of the legal fees in defense of a claim against your property, which is covered under your policy. It also contains provisions for indemnification against losses, which result from a covered claim. The premium is paid through escrow at the close of the real estate transaction. Title insurance is a one-time charge and there are no continuing premiums due, as there are with other types of insurance.

How much does Title Insurance cost?

Your title insurance policy is based upon the purchase or sales price of your property, usually less than 1% of the purchase price. It is a one-time premium, paid at the close of escrow. The important thing to remember is that you only pay once. The coverage continues in effect for so long as you own the covered property.

Who pays for Title Insurance charges, the buyer or the seller?

That depends… it’s a negotiable item in the purchase contract. The premium for a title insurance policy can be paid by the buyer or the seller or split between both parties. However, it’s customary for the buyer to pay the lender’s portion of the policy premium, assuming they are getting a loan.

Why does a Lender require Title Insurance?

Lenders require title insurance as a condition for your loan. Two types of policies are available, an owner’s policy and a lender’s policy. A lender’s policy insures that the lender’s security interest in the property has priority over claims that others may have in your property. The lender’s policy covers only the amount of its loan, which is usually not the full property value. In the event of a claim, the lender would ordinarily not be concerned unless its loan became non-performing and the claim threatened the lender’s ability to foreclose and recover its principal and interest. An owner’s policy insures the buyer for as long as they own the property and protects owners from claims by others against their property.

What is a title examination, or title search?

Title examination is the most important phase of a real estate transaction. The examination determines whether the title is marketable. It informs the Purchaser and the Lender if the property being conveyed is free and clear of any liens, encumbrances or judgments that may have arisen during prior ownership. It’s a close examination of all public records that involve title (deed) to a piece of real estate. The person conducting the search looks at past deeds, wills, and trusts to make sure the title has passed correctly to each new owner. The examiner tries to verify that all prior mortgages, judgments, and other liens have been paid in full.

What are “clouds” on a title?

Any document, claim, unreleased lien or encumbrance that might invalidate or impair the title to real property or make the title doubtful. Clouds on title are usually discovered during a title search. Clouds on title are resolved through initiating a quitclaim deed or a commencement of action to quiet title. A “defect” or “cloud” on the title is a problem that makes ownership questionable. For example, a previous owner sold the property 10 years ago. Her husband was listed on the deed but for some reason did not sign-off at closing. His interest in the property is a “cloud” and must be removed to clear the title.

If the title looks good why do I need title insurance?

Because remember we are all human and make mistakes. The examination covers all aspects of ownership during the years prior to your closing. Even an expert title examiner can miss a defect that might crop up to create problems for you later. A title search is done by examining public records to look up the history of property ownership. It shows not only limitations on the use of the property and rights others may have in the property, but also liens or monetary obligations that are outstanding against the property.

Lender’s Policy/Owner’s Policy.  What’s the difference?

There is no legal requirement to purchase title insurance prior to acquiring a property. In practice, any lender will require you to obtain, at a minimum, a Lender’s policy of title insurance for an amount equal to the loan. This protects the lender’s investment in the event of a third-party claim. The insurance remains effective until the loan is repaid.

A homebuyer will also want to obtain its own protection of the equity in the property since a Lender’s only policy extends solely to the loan amount. This requires an Owner’s title policy for the full value of the home. Typically, the additional cost to add Owner’s coverage to the cost of the Lender’s policy is small; all the more reason for any homebuyer to get the necessary coverage. By way of example: If the sale price of a home is $500,000.00 and the homebuyer is borrowing $400,000.00—the title insurance policy would include Lender’s coverage in the amount of $400,000.00 and Owner’s coverage in the amount of $500,000.00.

Is title insurance similar to other types of insurance?

No. Most insurance policies protect against events that happen after the policy is issued, such as a car accident that happens 6 months after purchasing a new car. Title insurance in most cases protects against losses arising from events that occurred prior to the issuance of the policy. The coverage afforded by these policies typically does not extend into the future. The exception to this is certain enhanced title insurance policies, which offer coverage of a limited amount of future occurrences that are spelled out. All homebuyers should check the state in which they are buying in order to determine if such policies are available.

Is title insurance required for a refinance of the existing loan?

Yes. The lender will require you to purchase a new lender’s policy because 1.) the existing policy terminates upon the full payment of the mortgage and 2.) the lender wants to protect itself from any title issues that have arisen since you took title to the property. The good news is that you won’t need to obtain a new owner’s policy and title companies generally offer a discounted premium if your last policy was acquired within a certain amount of time.

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