Buying a new home can be quite a tedious task. And once you’ve found the right one, closing is still a very complicated process for many. Adding to this, very few buyers are aware of basic terms. However, title insurance can be the difference between a satisfactory transaction resulting in ownership of a new home – and financial ruin.
So what exactly is it?
Title insurance by definition is indemnity insurance that protects the holder from financial loss sustained from defects in the title. Basically, a Title is a bunch of rights in a piece of property in which a person/party may own interest.
To explain this in a better manner, let’s take an example.
Suppose a person bought a house from the city in 1950. Since this man didn’t make a will, after he dies, the property gets transferred to his closest relative, say his brother in 1970. Later on, the brother sells it to another party in 2000. Suppose that a random person now knocks this party’s door and says he is the long-lost son of the first owner and hence he is the rightful owner of the property. And therefore the latest owner can’t hold possession over the property anymore.
This may turn out to be a catastrophic situation for the owner or for the lender who lent them the money. This is where the title insurance plays an important role. Having such insurance makes sure that the owner is protected from such devastating situations and keeps the title.
The lender’s title insurance, which is bought by the borrower just to protect the lender, is the most common type of title insurance.
Title insurance differs from traditional insurance by protecting against past occurrences rather than future events. Claims may include property ownership by a third person, fraud or forgery of title documents, outstanding laws, liens et al.
But before a policy can be issued, there is one vital step – Title Search.
Title searches are one of the first steps of closing a title insurance. It is basically an examination of all the available documents that relates to the history, ownership, and the financial condition of the given property. This is in an effort to identify any inconsistencies that could result in the loss of any kind.
Once an issue is identified, there are three outcomes to it-
- The issue is resolved.
- The sale is blocked.
- In some cases, unresolved problems require specific language to be written into the contract.
The examination includes any piece of information the party can lay their hands on, including chains of tile, tax searches, reports of possession, and name searches.
Still, even the most in-depth title search can overlook a variety of fatal issues. This is where the title insurance steps in.
How to get a Title Insurance
It is the escrow or closing agent who initiates the process of getting title insurance as soon as the purchase agreement is signed. An attorney usually chooses the title insurer.
There are two types – Lender’s insurance and owner’s insurance. Almost all the lenders require the borrower to purchase a lender’s title insurance in case the seller was legally not able to transfer title of ownership rights. A lender’s policy protects only the lender against the loss.
Since the owner, too, remains at risk of loss, there is a need of additional protection in the form of owner’s title insurance policy. Owner’s title insurance which is bought by the seller to protect the buyer against defects in the tile is optional.
Often a lender’s insurance and an owner’s insurance policy are required together to guarantee everyone is adequately protected. At closing, the parties purchase the title insurance as a one-time fee.
Risks of not getting a title insurance
Having no title insurance puts the transacting parties at significant risk in case where even a slight defect in the title is present.
Consider this – A homebuyer finds after closing that the house of their dreams has unpaid property taxes from the previous owner. There are two outcomes to this- either pay the taxes or lose the house to the taxing entity.
Considering the same scenario with title insurance, the insurer protects the buyer for as long as they own or show interest in the property.
Is Title insurance worth it?
What you pay for the title insurance varies on where you live and what the policy states itself. For example, when we talk in terms of dollars, a lender’s policy may cost around $2.50 for every $1000 of the coverage area. An owner’s policy may cost more. It depends on how much your home costs. It could run anywhere from about a few hundred to several thousand dollars. But if you see someone suing you later or you losing your house because of any of the above-mentioned reasons, it is better to get yourself the title insurance just for the sake of your peace of mind.