When purchasing a home, title insurance can alleviate some stress because it provides legal and financial protection if a challenge to ownership arises. The peace of mind that comes with purchasing title insurance is money well spent.
What is title?
When a buyer purchases a home, "title" to real or personal property, or the legal right to claim ownership, transfers from the prior owner (seller) to the new homebuyer (purchaser). A title to a property is a document that recognizes the valid, legal owner of a property.
What is title insurance?
Title insurance is designed to guard against defects in the title to one's home. A title defect is any condition or circumstance that can cause a title to be considered defective or invalid in some manner.
Unlike other forms of insurance, a title insurance policy provides protection against problems that may have already existed before the new homebuyer even contemplated purchasing the home. It protects both the mortgage lender and the homebuyer against legal challenges relating to the ownership of the home.
What are the types of title insurance?
There are generally two types of title insurance policies that come into play during a home purchase. They include:
- A lender's title insurance policy, also known as "loan insurance." A lender's insurance policy is designed to protect the mortgage lender by shielding it in the event of alleged title defects and disputes between buyer and seller that could lead to financial losses. Mortgage lenders typically require the homebuyer to purchase lender's title insurance. The fees are added to the buyer's mortgage closing costs. Lender's insurance policies remain in effect for as long as it takes you to pay off the loan in full. They also terminate if you sell the home.
- A homeowner's insurance policy, also known as "owner's insurance." A homeowner's title insurance policy is designed to protect the homebuyer if a claim is made against the title to the property after the property changes hands. In most home purchase transactions, the mortgage lender requires the purchaser to secure homeowner's title insurance as part of the closing costs. Owner's insurance policies remain in effect as long as you own your home. In the majority of cases, the homebuyer will purchase the owner's title insurance themselves. However, in some situations, the seller will pay for the homeowner's title insurance, either as a condition of the agreement of sale or as a sign of good faith.
Common title disputes
Some common title disputes that may arise include, but are not limited to:
- Forgery of a deed or fraud committed during the execution of a deed
- Unpaid real estate taxes
- Undisclosed or missing heirs to the estate or heirs born after the execution of a will who later claim ownership of the property
- Wills or trusts that have not been properly probated
- Errors in researching the title and in recording and filing required legal documents
Any of these issues can place your claim of title to the property in jeopardy. Without title insurance, the homeowner will be left to defend the claim on their own and pay for any financial losses out of their own pockets.
How does title insurance work if a dispute arises?
In the event the title to your home is challenged in a court, the title company will provide legal counsel and pay the legal costs involved in defending your position and resolving the dispute, up to the extent of coverage outlined in the policy. If an adversary's claim of ownership is determined to be valid, the title company will reimburse you for any covered financial losses, again, up to the policy's limits.
In some states, homebuyer's title insurance is not required. However, it is almost always recommended to protect against potential title defects.
What isn't covered by homeowner's title insurance?
A homeowner's title insurance policy generally does not protect the homebuyer against the overall condition of the home after the closing date. This includes the discovery of mold, radon, termites, an unrecorded underground storage tank, or structural defects. The owner's policy will not cover defects that may have developed after the settlement date.
How much does a homeowners title insurance policy cost?
Homeowner's title insurance is usually a onetime fee that the buyer pays at settlement. The cost of title insurance typically falls in the range of 0.5%-1% of the home's purchase price. Fees vary by state. The title insurance premium may increase if the amount of the loan increases.