What is Title Insurance and Do You Need It?
If you’re in the process of purchasing a home, the term title insurance has likely been mentioned to you.
In this article, we’re breaking down everything you need to know about title insurance from what it is and why it’s important to the different types and everything in between.
Let’s dive in!
What is Title Insurance?
Title insurance is a type of indemnity insurance, which protects an insured party (or parties) from unexpected losses. In the case of titles, it protects the insured parties from any financial losses due to issues with the title of a home.
During a real estate transaction, title companies will search public records to determine a property’s legal ownership and to ensure there are no claims on the property or defects with the title of any kind.
A clear title is crucial to ensuring a smooth and legal real estate transaction. Without a clear title or title insurance, you’re opening yourself up to tremendous risk. We’ll get into what these specific risks are bit below, but before we do, let’s cover the different types of title insurance.
Types of Title Insurance
There are two different kinds of title insurance: lender’s title insurance and owner’s title insurance.
Lender’s Title Insurance
Lender’s title insurance is almost always required when purchasing a home using a mortgage.
However, lender’s title insurance only protects lenders and their potential financial losses in the event the seller is not able to legally transfer title rights – not the homeowner.
Owner’s Title Insurance
Owner’s title insurance protects the homeowners in the same event where the seller is not able to legally transfer ownership rights. While owner’s title insurance is not required, it is smart to take out a policy to avoid financial losses that could end up being more than the cost of the property itself.
Now that we’ve gone over what title insurance is as well as the different types, let’s go over what title insurance covers specifically.
What Does Title Insurance Cover?
Both lender’s and owner’s title insurance, again, protect the insured parties from financial losses due to issues with the title. Unlike most insurance policies that protect against potential future events, title insurance protects from past occurrences.
While there are a plethora of reasons someone may file a title claim, we’re going to cover some of the most common.
These common risks claims include:
- Undiscovered encumbrances, including easements, encroachments, and liens
- Flawed records, both honest mistakes and outright forgery
- Conflicting ownerships claims
Encumbrances
Encumbrances are claims to a property by a party other than the homeowner. An encumbrance on a property can affect its transferability or restrict its free use until the encumbrance is removed.
The most common types of encumbrances when it comes to real estate include easements, encroachments, and liens.
Easements
Easements are a common type of encumbrance that grants a nonpossessory property interest to a party other than the homeowner. This allows the easement holders permission to use another person’s land.
Easements may be granted for a number of different reasons. For example, if a utility line runs through a homeowner’s property, an easement may be granted to the utility company to access these lines.
Encroachments
Encroachments occur when a party other than the property owner intrudes on or interferes with a property. Examples of encroachments include issues like the building of a fence over a property line or planting a tree whose branches cross over a property line.
When an encroachment occurs, an encumbrance is put on both properties until the issue is resolved.
Liens
Liens, a type of financial encumbrance, are claims or legal rights to assets used as collateral to satisfy a debt. In real estate, liens are most often put on properties by government forces in the event of owed back taxes or by a lender for failure to pay a mortgage or home equity lines of credit.
Flawed records
Sometimes, records are just wrong.
Incorrect records could be a result of honest mistakes such as misspelled names or wrongly describing the property, or they could be the result of something more intentional like outright forgery. Either way, records will need to be corrected before a clear title can be issued.
Conflicting Ownership Claims
Conflicting ownership claims on a property can be the result of conflicting wills, a long lost heir coming back into the picture, or someone outright pretending to be someone else.
Although these occurrences are less common, they still unfortunately do happen.
How To Purchase Title Insurance
During closing, if you’re purchasing a home using a mortgage, you’ll be required to purchase a lender’s title insurance policy at a minimum. And hopefully at this point, you see the benefit of purchasing an owner’s policy as well.
To do so, you’ll go through a title company where they will execute the public records search to ensure a clear title for sale.
How Much Does Title Insurance Cost?
Title insurance premiums vary depending on where you live and how much the home you’re purchasing is worth. In some states, premiums are fixed while they’re unfixed in others. For most properties though, you can expect to pay up to a few thousand dollars (although the price may go up considerably if you are purchasing a 25-50M home for example).
Luckily though, title insurance premiums are only paid once at closing, so paying a few thousand dollars now may end up saving you a few hundred thousand later!
Bottom Line
Hopefully at this point you have a good understanding of what title insurance is and why you need it.
If you have any lingering questions, reach out to us at (703) 651-5655 for a no strings attached conversation.
