This service has been an essential element of the real estate industry for centuries. It’s designed to protect the buyer, seller, and the mortgage lender in one fell swoop. So, why don’t more people understand exactly what it does if it’s greatly beneficial to all parties involved in real estate transactions?
With this article, we will address that question and then explain why you must buy title insurance the next time you make any real estate transaction.
How Does Title Insurance Work?
As part of the title insurance process, title companies conduct deep dives into the nooks and crannies of public records. Title searches critically examine the history of properties to ensure that everything goes according to plan when buyers and sellers sign the final closing documents.
As you might’ve noticed, the title insurance process runs counter to regular insurance, which operates under the assumption that something could happen in the future rather than what happened in the past. Furthermore, since regular insurance seeks to actively mitigate against that future risk, you have to pay for that protection every month.
In contrast, title insurance is a one-time service to investigate potential title defects. You only pay a one-time fee, and it’s typically rolled into the closing costs. So, title insurance assumes that everything the seller of the property tells you is correct, but it’s a good idea to be protected against unforeseen circumstances. Hence, there’s a need for both traditional and title insurance.
What is a Title Defect?
A title defect is any bit of information, knowledge, or past activity that could keep you from owning a home. These include diverse scenarios such as:
- Forgery and fraud
- Incorrect documentation
- Liens (typically from unpaid construction bills)
- Previously unknown heirs
- Outstanding taxes and assessments
- Opposing claims of ownership
Simply put, think of title insurance as a home inspection for real estate records. Instead of examining the physical foundation and the overall health of the property, title insurance looks for assorted legal and financial concerns. The last thing you want to happen when you buy a home is to learn AFTER you bought it that you shouldn’t have been able to do so because of past activities.
What are the Different Kinds of Title Insurance?
As we mentioned earlier, title insurance aims to protect all parties in a given real estate transaction. But for this to happen, you as the buyer need to purchase two different kinds of insurance: Owner’s and Lender’s.
Owner’s title insurance is purchased by the seller — aka the current owner of the property — to protect the buyer and seller from the legal title defects. Sellers perform this service as a way to show that they’re selling the property in good faith. It’s their way of saying, “there aren’t any title defects on this home, and I want to guarantee it for you.”
As the homebuyer, you purchase this insurance to protect the lender from any potential financial loss caused by title defects. As in, if an old mortgage, construction loans, or taxes appear, the mortgage lender would be on the hook for them as the party providing the money to buy the home and this insurance protects them from those surprises.
How Much Does It Cost?
While the price can depend upon where you live, it’s a set fee in most states. This means you don’t really need to shop around to find a “good deal” or a “better price.” However, we do recommend that you speak with your real estate agent to learn more about the price of title insurance in your area.
How Can I Buy It?
Title insurance is purchased through any certified title company. Since the prices are often fixed by legislation at the state level, you want to work with a company that offers excellent service to all parties involved, including you, your real estate agent, your mortgage lender, and your seller. Typically, the seller buys title insurance on behalf of the buyer, and it’s a comprehensive policy purchased at closing.
Title insurance might seem like an esoteric afterthought tacked onto closing costs — an extra afterthought you don’t really need. In reality, title insurance is a must-have element for every successful real estate transaction.