Title insurance is a form of indemnity insurance which protects the policyholder from financial loss sustained from defects in a title to real estate property. The most common type of insurance is the lender
’s title insurance, which the borrower purchases. The coverage only protects the lender.
Owner’s title insurance is often paid by the seller to protect the homebuyer’s equity in the real estate property. It’s available separately.
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How Title Insurance Works
Title insurance protects both lenders and real estate owners from damages or loss resulting from liens
, encumbrances, or title defects by identifying the actual ownership of a real estate property. This is unlike traditional insurance, which protects against future events: Title insurance protects against claims for prior occurrences. Common claims filed against a title are back taxes, liens (e.g. mortgage loans
), and conflicting wills.
Title insurance covers costly future penalties and fees for a one-time, upfront cost, which includes a deep searches of title data dating back to the early 1800s.
What Does Title Insurance Look For?
A clear title is essential for any real estate transaction. Title insurance companies search every title in order to crosscheck for claims or liens of any kind against them before a title can be issued. A title search is a search of public records and is meant to examine a property’s legal ownership. The search determines and confirms whether there are existing claims on a real estate property. Unresolved building code violations and erroneous surveys are two instances when the title would be considered “dirty.”
The title insurance process is performed by an escrow or closing real estate agent. In the U.S., there are five major title insurance underwriters, which most attorneys or agents generally recommend:
- Fidelity National Financial
- Old Republic National Title Insurance Co.
- First American Corp.
- Stewart Title Guaranty Co.
- Diverse Regional Independent Companies
There are two types of title insurance—lender’s insurance and owner’s insurance. The majority of lenders require borrowers to purchase a lender’s title insurance policy to protect the lender in the event the seller is not legally capable of transferring the title of ownership rights. A lender’s policy only protects the lender against loss. An issued policy signifies a complete title search, offering assurance to the homebuyer.
Title searches are not without errors and can put the owner of the property at risk of loss. This presents a need for additional coverage, which is offered via the owner’s title insurance policy. Owner’s title insurance, generally purchased by the seller to protect the buyer from defects in the title, is voluntary.
The most conventional type of title insurance is the basic lender’s policy, which offers coverage against mechanics liens, various unrecorded liens, unrecorded easements, and access rights or defects.
Sometimes both a lender and owner policy are required to guarantee all parties are adequately protected. The Real Estate Settlement Procedures Act (RESPA) prevents sellers from requiring purchase of title insurance from a particular carrier.
Who Pays for Title Insurance
An owner’s title insurance policy usually has the seller pay the costs for the new homeowner. Meanwhile, a lender’s policy is paid by the homebuyer. For an owner’s title policy, the fee is offered as a credit to the buyer’s closing costs. With a lender’s title policy, the fee is generally covered by the buyer prior to closing.
Benefits of Title Insurance
For many real estate property owners, their property is their largest investment—well worth protecting. Real estate investors should make sure that a property does not have a bad title before proceeding with the purchase. Homes in foreclosure, for example, may have a number of outstanding issues.
Title insurance provides protection against financial loss from unforeseen claims against the title. When selling a property, title insurance can offer protection against financial loss if the sale falls through from a covered defect in the property title.
Nevertheless, an owner’s policy provides a range of advantages, including protection for as long as the homebuyer—or their heirs—own the property.
The lender’s title insurance covers banks and other mortgage lenders from unrecorded liens, access rights, and other defects. In case of a borrower’s default, if there are any issues with the property’s title, a lender would be covered up to the amount of the mortgage.
Having no title insurance exposes transacting parties to significant risk in the event a title defect is present. Consider a homebuyer that has found the home of their dreams—only to find out after closing that there are unpaid property taxes from the previous owner.
Without title insurance, the financial burden of this claim rests solely with the buyer. They will either pay the outstanding property taxes or risk losing the home to the taxing authority. Under the same scenario, with title insurance, the insurance coverage protects the buyer for as long as they own or have an interest in the property.
Is Title Insurance Necessary for Real Estate Investors?
Whenever you purchase, finance, refinance, or sell real estate, title insurance is generally recommended. The difference between a good, clean title and a blemished title can be the difference between a profitable investment and a disaster.
There may be existing real, implied, or improper risks to the title, many of which can be unseen or well hidden. These ownership risks can adversely affect ownership of an investment property. Title insurance ensures that a property has “marketable” or valid title. The insurance ensures that the owner has a true ownership interest in the property. Title insurance protects both the owners of record and lenders against the loss or damage, according to the terms of the specific title policy.
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