Financing

What Is Title Insurance

Knowing about title insurance helps ensure that you have access to all of the funds that you need to solidify the deal that you’re trying to make.

When you’re going through the process of buying a home, you may already be aware of the several different types of insurance that are a part of home ownership. Obviously, you will have to have homeowner’s insurance, but there is also private mortgage insurance and other safety nets in place that protect you, the lender and the seller. However, you should also educate yourself on title insurance as well. 

What is a Title?

If you’ve ever bought or sold a car, you’ve probably heard about vehicle titles. Real estate titles work the same way. In the world of buying and selling homes, having the title to a property gives the person who holds the title the right to perform any legal action with the property. This includes buying, selling, renting, renovating, destroying and every other action that is allowable by state and local regulations. 

What is Title Insurance?

Title insurance is a type of indemnity insurance that protects homebuyers and mortgage lenders from financial loss that stems from a defect in a title to a property. It’s not uncommon for mortgage lenders to require borrowers to purchase title insurance as a part of their mortgage contract. Additionally, many buyers put title insurance in their purchase contract, requiring the person or people selling the home to purchase it to protect them in the event that there is a defect with the title.

What is a Title Defect?

To understand what a title defect is, we must first understand what a clear title is. A clear title is a necessary part of the equation for any real estate transaction. Before your real estate transaction closes, a title company will do a title search in an effort to find any liens or claims against the property that you are trying to buy or sell. 

During the title search, a professional title company will do extensive research through public records to determine if any outside party has a claim to the subject property. There are several different causes of defects (often referred to as clouds) on a title. Some of the most common types of title defects include:

  • Invalid signatures on past contracts including those that were forged or fraudulent
  • Incorrect records
  • An ownership stake that is held by another party
  • Outstanding property taxes
  • Liens placed on the property by a lender or a contractor who worked on the property but was never paid
  • Unrecorded easements on the property
  • Outstanding lawsuits against the property

If you have put in an offer on a property and the title company’s research shows any of these outstanding issues, title insurance provides financial compensation to you. Similarly, title insurance that a lender requires you to buy protects them in the event that their mortgage loan falls through due to a cloud on the title.

How Do You Purchase Title Insurance?

In most cases, the closing or escrow agent initiates the process of purchasing title insurance when the purchase contract is executed. In the United States, there are four major title insurance underwriters:

  • First American Title Insurance Company
  • Fidelity National Financial
  • Stewart Title Guaranty Company
  • Old Republic National Title Insurance Company

It’s also worth noting that there are some regional title insurance companies that your escrow agent may recommend to you.

The cost of title insurance varies between states and regions and between companies, but it generally costs somewhere between $500 and $3,500. While this may seem like a large amount to pay for insurance that you may never have to use, there are several benefits associated with purchasing title insurance on the property that you are trying to buy.

Benefits of Title Insurance

Hypothetically, let’s say that you have found your dream home. After months of searching, you’ve come across a property that has the space that you’re looking for with the floorplan that you desired. However, just before you get the keys and are ready to move in, you find out that the previous owner owed $2,500 in back taxes on the property. Having title insurance provides you with the necessary funds to remove the tax lien from the property.

For lenders, title insurance offers protection against unrecorded liens, undocumented access rights and other defects that a title may have. In the event that the borrower defaults on the loan, the lender would be covered for the amount that they loaned them.

Knowing about title insurance helps ensure that you have access to all of the funds that you need to solidify the deal that you’re trying to make. Without this insurance, you may be susceptible to other people, businesses or state entities who say that they have a claim to the property. 

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