When you’re buying a home, you obtain a title—a legal document that declares you are the owner of the property you are purchasing. A document called a deed records the property’s title as well as the transfer of the title from one owner to another. This transfer will be recorded in the public archives of your county, just like it was for every previous owner of the property.
In an ideal situation, the title is transferred to your name at closing without any problems regarding the title. But sometimes unexpected obstacles come up, putting this transfer in jeopardy and complicating the closing process. Sometimes there is a dispute about who is the actual owner and who is permitted to sell the property. This can arise from a divorce, different kinds of titles that the owners hold, or even wills that delineate who owns a home after a death. Another common issue is unpaid taxes on the property, unpaid bills from contractors, or other unpaid bills that the current owner has not paid and must pay in order to be released from the title. These along with a number of other potential issues can, and do, frequently occur in the midst of a home sale. Title insurance is designed for these problems and protects the buyer from complications during the closing process.
What is title insurance?
Title insurance is specialized insurance that protects you from problems with the ownership title when you purchase real estate. Even though you’ve done the inspections and think you know everything you need to know in order to close, there may be problems that existed before the purchase that you couldn’t have known about—problems like unpaid property taxes, fraud, or forgery of the previous paperwork, or a spouse, former spouse, or unknown heir who claims to own the property. Even the current owner may not know if someone else has a claim to the property prior to selling it. These issues arise more than you might think, and are exactly why title insurance exists! To protect you from a problem that shouldn’t be your responsibility.
Before you close, your mortgage lender will order a title search from a title company. This company will search public records related to your home and uncover any “defects” like liens, easements, or encumbrances. A lien can be placed on a property by a contractor, lender, or tax authority that has not been paid. If these are in place after you close, you may be responsible for paying the previous owner’s bills.
An easement is a right that someone else has to use your property even though they aren’t the owner. This might be a shared driveway or a portion of land that holds a septic system on a neighbor’s property. An electric company might have an easement on property that backs up against power lines, meaning they have access to that property if they need to work on the lines. Easements come about for many reasons, but often when land is split into smaller properties or neighbors make arrangements to share a portion of property that is mutually beneficial. Overall, an easement on your property may limit your ability to use your property in the ways you want and a title search will reveal if an easement is in place.
Encumbrances include liens and easements but also include zoning laws, covenants made by homeowners associations, or leaseholder rights. Zoning laws vary drastically between city and county and might keep a future owner from adding on to the existing home, adding a fence, or other additions to the property that you might want to make. Homeowners association covenants can restrict anything they like—the height of your fence, how frequently you must mow your lawn, what kinds of animals you are allowed to keep on your property, and more. Be sure to examine these covenants closely because they will act as a governing authority concerning your property.
These are the kinds of things that a title search will uncover for you to be aware of, along with any other claims to the property from an ex-spouse, adult child who claims ownership, or any other similar instance. When the title search is performed, any and all of these issues will be uncovered and your title insurance will protect you from costly problems.
Do I have to lose my property to make a claim?
Though title issues can lead to you losing the property, that isn’t always the case. Furthermore, you don’t have to lose the property in order to make a claim through your title insurance. As soon as you become aware of an issue with your title, you can contact your title insurer or the agent who issued your policy. From there you will file a claim for them to process. They will also be able to answer any relevant questions that come up for you. Your title insurance includes coverage for legal expenses which may be necessary to investigate, litigate, or settle an adverse claim. As you probably know, legal expenses add up quickly, making your insurance an invaluable asset as you navigate the tricky territory.
To file a claim, you will tell your insurance company what the problem is in detail. The insurance company will need details about the property and any documentation regarding the issue at hand. From there they will guide you through whatever process you need to take in order to resolve the problem.
Sometimes, however, in cases like a dispute over who is the rightful owner of the property, the parties involved may need to go to court. This can lead to weeks or even months of legal procedures as the two parties sort out the ownership issue. This would be a typical time to file a claim with your title insurance, but oftentimes, potential buyers do not want to wait or grow weary of these unexpected issues leading them to walk away from the property.
What does it cost?
When you buy title insurance, it is a one-time, up-front cost to cover the title as long as you are interested in the property. The cost of title insurance varies depending mainly on the value of your property. Other factors like the state in which you live and which insurance agency you choose also impact the cost, but insurance typically ranges from $500-$3500. In some states, title insurance costs the same no matter which insurance company you choose, but in others, it may be more or less and you will want to shop around for the best deal. According to the Consumer Financial Protection Bureau, if you shop around, you may save as much as $500.
Typically, your lender will give you a recommendation of which insurance company you should use. You can go with their suggestion or opt to find another insurance company. Sometimes lenders recommend an insurance company that suits their needs more than it suits yours, but other times they point you to the best deal. Either way, it doesn’t hurt to get a few estimates before you commit.
Unlike other insurance policies, you will only pay once rather than in an ongoing or monthly way. Once you close and obtain the title in your name, your insurance will no longer be necessary. Alternatively, if you decide not to buy, your insurance will expire. Though it might seem like there are many unexpected costs to buying a home, this expense is one you don’t want to overlook as it will save you thousands if problems with the title arise.
If my lender gets title insurance for its mortgage, why do I need a separate policy for myself?
Though it might seem redundant to have your own title insurance if your lender already has title insurance, the lender’s insurance protects them and the loan they are preparing to distribute, not you. This means it is essential that you also obtain title insurance to protect yourself should problems arise with the title. The lender’s policy covers only the amount of its loan, which is usually not the full property value. This means that in the event of an adverse claim, the lender would not be concerned unless the loan was in jeopardy and became non-performing.
Think about the owner, the lender, and the seller as three separate parties all interested in the same thing (selling the home) and also all interested in protecting themselves should something go wrong. The owner’s title insurance protects the owner, not the lender. Furthermore, though the lender’s insurance will only cover the amount of the loan they are distributing, the owner’s insurance will cover the full home value.
Overall, title insurance is a must-have when you are closing on a home. The process of buying a home is stressful enough as it is and becomes even more stressful when unexpected problems with the title come up. By getting title insurance, you protect yourself from existing liens, other claims to the property, and legal fees. Title insurance is easy to obtain and is relatively inexpensive, especially when compared to the legal fees you would be paying if a title problem arose. So as you get ready to close on that dream home, don’t forget this important step! It will save you money, time, and energy.