What Is Title Insurance For A House?
3 minute read
What Is Title Insurance For A House?
You probably already have car insurance and health insurance to protect yourself financially if something goes wrong. And if you’re a homeowner, you’ll need to get some insurance as well.
One of the many types of insurance you’ll need to get when buying a home is title insurance. It differs from homeowner’s insurance, but it can still be a financial lifesaver in unlikely yet detrimental circumstances.
Network Capital tells you everything you need to know about home title insurance, as well as how to go about getting it.
What Is Title Insurance?
Title insurance protects yourself, as well as the lender, against loss or damage from liens, encumbrances, or title defects. For instance, if a previous owner never paid for a portion of construction on their home, the construction company will come for the current owner to receive payment. They aren’t concerned about who pays it, as long as they get their money. This can put you in a situation where you’re paying for something you don’t need to be.
Title insurance protects you from the property’s past rather than the future. With title insurance, you are protected against legal claims or fees that would otherwise become your responsibility.
When you purchase a home, you’ll need what’s known as a clear title. Title companies are a third party outside of yourself or a lender that will research the previous title to ensure that it is legitimately given to the buyer. In other words, they make sure that a seller has the right to sell a property to a new buyer.
This is done through a title search. The title company will examine public records to determine ownership or locate any “blemishes” on the title. Things like outstanding electric bills or unresolved code violations can make a title “dirty.”
Title searches will look for the following:
Outstanding liens: previous owners may have left unpaid construction bills, property taxes, or other debts that you may become responsible for if left unresolved.
Chain of Title: a title chain reveals all of the previous owners of a property. Knowing the chain of title is important for identifying any second owner of a property.
Pre-existing Mortgage: Unless the previous owners have paid off their home in full, the remaining balance needs to be paid off in full before closing. A title search will check to see if that’s the case.
Restrictions: although uncommon, a restriction is anything that affects the free transfer of ownership. An example may be that the community requires its residents to be of a certain age. This needs to be addressed before closing:
Easements: an easement gives a person the right to enter a property for a specific purpose. For example, the previous owner might have an easement allowing the neighbor to use the driveway. A title search can reveal these.
Having a clean title is necessary because it proves that you are the rightful owner of a property and that you can’t be challenged. For example, if a title company finds that a previous owner never paid construction bills, this can be resolved before you move in so that you are not held liable.
However, there are times when title companies miss this sort of information. That’s where the necessity for title insurance proves true.
Types of Title Insurance
There are two types of title insurance: lenders and owners. Almost all lenders would require you to purchase a lender’s title insurance to protect themselves if the seller did not legally transfer the title of ownership rights. As the name implies, the lender’s title insurance only protects the lender.
The owner’s title insurance is optional, though it is highly recommended. This protects the homebuyer from potential losses due to title claims. The seller often purchases it to protect the buyer.
What Does Owner’s Title Insurance Protect From?
A basic owner’s title insurance policy will protect you as the homebuyer from the following hazards:
- Ownership of some, or all, of the property by another party.
- Forged, fraudulent, or incorrect signatures on paperwork.
- Unrecorded easements give another party the right to utilize a property.
- Flawed records.
- Outstanding lawsuits, liens, or debts.
Title insurance won’t protect you from future damage to the structure or foundation of your property. For that, you’d need a homeowner’s insurance policy, which is normally a requirement by most lenders.
Additionally, it can’t protect you against damage to the title that you may have caused. For instance, if you fail to pay your own property taxes, your owner’s title insurance won’t cover it.
What If I Don’t Have Owner’s Title Insurance?
Choosing not to obtain owner’s title insurance is an option, but it is not recommended. This is because, without it, you may be subject to complex, time-consuming, and expensive legal battles.
Suppose you were to buy a home that still had outstanding property taxes from a previous owner, the responsibility to pay them backrests solely on your shoulders if a debt collector were to try to collect their funds. This can make you financially responsible for outstanding liens or put you at risk of losing your home.
However, with title insurance, you’re financially and legally protected from this same scenario. Not only will that save you money compared to the cost of title insurance itself, but it will also save you a very fair amount of time and stress.
Buying a home is one of the most expensive purchases you’ll probably ever make in your life. In the grand scheme of things, it makes a lot of sense to add a little bit extra upfront so that you can have peace of mind down the road.
Cost of Title Insurance and Title Searches
The cost of title insurance and a title search will vary based on state, home price, location, and several other factors. However, the good news is that both are a one-time upfront fee, meaning you don’t need to pay them monthly.
Based on a $200,000 home, you can expect to pay somewhere around $544 for lender’s title insurance and $830 for owner’s title insurance, at least based on national averages. This comes out to a total of $1,374 for both forms of title insurance.
While this may seem like a hefty fee, this is nothing compared to the potential legal fees or outstanding debt costs you may be responsible for should a claim on your title arise. Not to mention, you can shop around at different lenders to try to find better rates.
Title searches are usually much less expensive. You can expect to pay anywhere between $75 to $200 for a home title search. The price generally goes up if your home is older, larger, or exists in a more expensive location.
If you’re looking to save some cash, know that you can theoretically conduct a title search on your own. However, this can be complicated and time-consuming if you don’t know what you’re doing.
Having a title clear of any outstanding claims can save you thousands in the long run, so it might be a good idea to spend a few bucks and let a professional handle it.
Additionally, some lenders may be willing to offer discounts for first-time homebuyers or a “short-term rate” for homes that have been resold within the last five years. Additionally, you might be able to save some money if you bundle your owner’s and lender’s title insurance within the same lender.
At the end of the day, if you decide to conduct a title search on your own, it cements the importance of at least getting yourself some owner’s title insurance.
Title Insurance vs. Warranty Deed
Deeds are written documents that transfer property ownership from seller to buyer. This differs from a home title, which is an abstract concept that is represented through public records.
Deeds contain detailed descriptions of the property and information about who the current owner is. There are many types of deeds, but general warranty deeds offer the homebuyer the most protection.
Under a warranty deed, the seller becomes responsible for any faults in the property, even if they were the result of something prior to their ownership. For example, if the state comes to you looking for an outstanding electric bill on the property, it would become the seller’s responsibility -- not you.
Warranty deeds offer you protection while also legally transferring the property from seller to buyer. However, they are no substitute for title insurance. When the grantor of a warranty deed dies or goes bankrupt, the deed essentially loses its effectiveness, and you may be stuck covering expenses.
How to Get Title Insurance
Your mortgage lender will likely recommend a title company to you. While this is because they may get you better rates or a more streamlined process, you have the freedom to choose any title company you’d like.
Sometimes, it can be advantageous to have a new company conduct the title search because some places will offer less expensive closing costs than the one recommended to you. With that said, a title company that works closely with your lender may also have the best rates.
Overall, however, you want to look for a reputable company that has been around for quite some time. This shows that they know how to search properly and that they are less likely to miss anything in the public records that might get you into some murky territory in the future.
Additionally, it never hurts to ask the title company if you’re eligible for any discounts. Not to mention, you may have the power to bargain with title companies if another provider is willing to give you lower rates. Never pay more than you need to.
Title insurance is an addition to the closing costs of your home in the form of a one-time fee. There are two types of title insurance: lenders and owners. A lender requires a lender’s title insurance in order to protect themselves from financial loss. Owner’s title insurance protects you from the same hazards, though it is entirely optional.
Title insurance protects you financially if a claim on title arises. With that said, clouds on a title can be avoided completely with a proper title search. Title companies conduct title searches, and they involve searching through the public records to prove the rightful owner of a given property.
If you don’t have title insurance, it may put you in financial jeopardy. For example, an outstanding property tax from a previous owner may become your responsibility. And if you don’t pay the lien, you may be at risk of losing your home.
While title insurance can make the costs of closing even higher, it’s highly recommended. It may be able to save you a lot of time and stress in the future.
Plus, by choosing a lender such as Network Capital, you can save on closing costs with $0 lender fee programs. It makes it that much easier for you to budget for your future to secure the home of your dreams. Click here to learn more.