Here’s a nightmare scenario: you take out a loan for hundreds of thousands of dollars to buy a new home. You sign the papers, shake your real estate agent’s hand, and move your things in. Everything’s all and well...until you suddenly find out that someone else is claiming ownership of your property – and they have the deed to prove it!
Now, you’re virtually homeless and drowning in debt, all because you made the mistake of buying the wrong property.
This scenario is a lot more common than you think. The best safeguard against it? A title insurance policy.
What Is Title Insurance?
Most types of insurance protect you financially from things that might happen in the future, like accidents or diseases or even death. Title insurance is different in the sense that it protects you from mistakes that happened in the past. Specifically, mistakes in recordkeeping and transfers of ownership.
If you can properly trace the ownership history of the property, it assures you that you’re buying a clear title. The title insurance company conducts a title search to check if there are any claims or liens on your property. This could unearth any unresolved issues with the title such as clerical errors, fraud and forgeries, building code violations, and the like – information you’d probably want to know before you take out an expensive mortgage. The seller is obligated to correct those problems before closing the sale, saving you from major headaches in the future.
That’s not all an insurance title does. An official title search is usually quite thorough, but there’s always the possibility that the insurer overlooked something that could bite you later on. This is why the title company will also offer insurance coverage for your home loan, just in case ownership problems pop up after you’ve purchased the property.
If there’s an issue that comes up later, having title insurance protects you from the financial consequences. You won’t have to worry about covering unpaid back taxes or losing your home to someone else because the title company will help defend you in court.
Types Of Title Insurance Policies
There are two main types of title insurance policies: the lender’s title insurance policy and the owner’s title insurance policy.
Most mortgage lenders require title insurance if you’re trying to take out a loan. A lender’s title insurance policy protects the lender in case you default or if you’re released from payment because the transfer of property rights wasn’t legal in the first place.
An owner’s title insurance protects the new owner. If someone later stakes a claim on your title, owner’s insurance will cover any legal fees and will also require the title company to back you up.
It doesn’t matter who pays the title insurance premiums. It’s customary for the seller to pay for owner’s insurance while the buyer covers the policy of the lender. However, this is negotiable – for example, the seller might offer to buy both to close the deal, taking you off the hook for title insurance costs.
Do You Really Need A Title Insurance Policy?
If you’re taking out a mortgage to pay for the home, chances are, you’ll be required to buy title insurance for the lender. However, whether you’re required to or not, we highly recommend buying owner’s insurance as well.
You spent hundreds of thousands of dollars on a home, so why wouldn’t you want to protect your investment? It’s not absolutely necessary in all cases, but having title insurance puts your mind at ease. A small, one-time payment is a drop in the bucket compared to the thousands of dollars in legal fees that come with a property dispute.
Plus, the title search that comes with most policies is very helpful for spotting problems before they escalate. You can’t be sure you have a clean title if you don’t have a title company conduct a title search first.
Title Insurance Costs
Unlike most insurance premiums, you only have to pay for your title insurance once – when you close on the home. The cost of title insurance (for both the lender’s and owner’s policies) is usually at 0.5-1% of the property sale price. In 2020, the median price of a home is roughly $250,000, which means that your policies could cost anywhere from $1,250 to $2,500.
Of course, since property values vary across the United States (and across different local lenders), this number could fluctuate wildly. The more you pay for your home, the more your title insurance will cost.
The good news is that it’s a one-time expense, but you get coverage for as long as you own your home. Title insurance covers many different costs, such as the title search fee, notary fee, and government taxes.
You can get an estimate of the total cost by using a title insurance cost calculator. Just keep in mind that the rates may differ from one insurance provider to the next, especially depending on your location.
How To Buy Title Insurance Policies
When you’re ready to buy title insurance, follow these steps to get the best estimates possible.
1. Decide On What Type Of Title Insurance Policy You’re Buying
First things first, you’ll most likely have to buy title insurance for your lender. The real question is, do you want to buy title insurance for yourself, the new owner of this property? Again, owner’s insurance isn’t obligatory, but it’s a great way to protect your financial investment.
2. Shop For Potential Title Insurers
The seller, real estate agent, or mortgage lender may give you recommendations for title companies, but it’s always a good idea to shop around on your own. Comparing rates before you sign with one can potentially save you hundreds of dollars. We’ll talk about how to choose the right insurer later in the guide.
If you buy both an owner’s policy and a lender’s policy from the same company, you may be able to get discounts on both. Once you inquire about rates from an insurer, they’ll usually get back to you with an estimate within three days.
3. Schedule A Closing Date
Finally, when you’ve decided on the right insurer for you, it’s time to schedule your closing with the seller. Make sure it falls within the validity period for your title insurance rate while giving enough time for your other requirements (e.g. loans) to push through.
How To Choose The Right Titles Insurance Provider
When you’re choosing between title companies, use this guide to narrow it down.
Insurance Policy Coverage
The first thing you need to look at is coverage. Ask for an itemized breakdown of what’s included in your policy so that you’re comparing providers equally. Here are some things you might want coverage for:
Forgeries, fraud, impersonation
Undisclosed mortgages or liens
Undisclosed use restrictions or easements
Improperly recorded deeds
Erroneous property surveys
Building code/zoning ordinance violations
The total cost of the title insurance policy will always factor into any home buyer’s decision-making process. Most states regulate the cost of the title insurance fees, but it’s the title company’s prerogative how to price other charges.
It’s understandable that you want to get the best price possible, but be careful about being too stingy. This is insurance for your home – an investment that likely cost you hundreds of thousands of dollars – so, you don’t want to skimp.
Title Insurance Company
One of the biggest factors in your decision should be the title insurer itself. Factor in their experience, reputation, customer service, and financial strength – all of these tell you whether or not you should trust the company with protecting your home investment.
You should also take other things, like the convenience of the location and how well the company communicates with their clients, into consideration.
If you’re really stumped about which insurer to go for, you can always ask friends and family for recommendations. Your real estate agent, mortgage lender, and the seller may also have their own top picks. Pay particular attention to your lender’s suggestion – their goals align most closely with yours. Your loss is their loss, so they have more incentive to recommend the best title insurer possible.
Title Insurance Tips
Read all of the documents that come with the title search. Anything from deed irregularities to HOA restrictions will be included there – all pertinent information if you’re making a home purchasing decision.
To save the most money, buy your owner’s and lender’s title insurance policies at the same time from the same company.
Negotiate with the seller. Some may include the purchase of a title insurance policy if you ask.
You have the right to choose your title company. If the seller insists on using one of their picks, they should shoulder some of the costs.
If you’re planning to buy a new home, make sure to factor the cost of title insurance in. Without it, you risk huge financial losses (and emotional stress) if there’s a problem with your newly-purchased property. And at a fraction of a percentage of the property sale price, we believe it’s more than worth the investment.
Contact Wesley LLC and get a quote on title insurance today!