When buying a home, there are a lot of extras you’ll need to consider besides your mortgage. One example is title insurance, which financial institutions require you to purchase before providing a home loan. You’ll also have the option to buy title insurance for yourself.
What Is Home Title Insurance?
Home title insurance is a safeguard that protects the lender or homeowner from previously unknown ownership claims to your house. It’s sometimes referred to as mortgage title insurance. There are two types of title insurance that protect the lender or the homeowner.
Lenders require homeowners to purchase home title insurance as part of the mortgage process. The lender is the entity that provides you with your home loan.
A buyer can purchase residential title insurance to protect their equity in the home in case someone claims they have a valid legal ownership stake in the house. The buyer is the individual who takes out a mortgage to purchase a home.
Sellers usually aren’t involved in the title insurance process, since they release their claim to the home during closing. They’ll no longer have a financial stake in the house to protect. An exception occurs if they decide to finance the mortgage themselves.
How Does Title Insurance Work?
During the closing process, the buyer will purchase lender’s title insurance when they take on a mortgage. They’ll also be able to buy owner’s title insurance to protect their interests.
Before granting real estate title insurance, the title company will search public records to determine if there are any known claims on the property or other title problems.
Title insurance will reimburse the lender for the mortgage balance for undiscovered claims to the home, like liens or back taxes. Typically, if a valid claim arises, the buyer will stop paying the mortgage unless the issue resolves in their favor. The lender can only recoup their losses through its title insurance policy.
Buyers can purchase their own title insurance policy, but it’s not a requirement. Buyers can use their title insurance policy to pay off unknown liens or help with legal costs if someone claims ownership rights to the house.
What Does Title Insurance Cover?
The lender’s title insurance protects the lender from any of the following:
- Tax liens
- Unpaid contractor liens
- Claims on the property by unknown heirs or previous owners
- Undocumented easements
- Forged titles
- Unpaid home equity lines of credit from prior owners
If the buyer purchases title insurance for themselves, it will cover the costs of:
- Problems with the property survey
- Buyer’s equity, if a valid claim to the property exists
- Inheritance conflicts
- Tax and contractor liens
- Property deed errors
- Forged documents
- Building code violations from a prior owner
Buyers must understand that title insurance protects them from actions they’re not responsible for, such as unknown claims that the prior owner left unpaid. It does not protect them from their own mistakes, like failing to pay property tax.
Difference Between Owner and Lender Title Insurance
Lender’s title insurance, also called seller title insurance, will protect the lender from financial losses should someone have a material claim to the property, such as an unpaid tax lien or actual ownership. In such a situation, title insurance will compensate the lender for the remaining outstanding balance on the mortgage.
Almost every mortgage lender will require the buyer to purchase title insurance before finalizing a home loan or refinancing an existing mortgage.
Owner’s title insurance, or buyer title insurance, isn’t required for most mortgage loans. However, buyers should purchase it to protect their financial interests in the home. For a relatively small expense, buyers can rest easy knowing they’re protected if a claim arises on the property.
Warranty of Title as an Alternative
A title warranty is the seller’s guarantee that a property is free from any claims, such as unpaid tax liens or contractor bills. It also guarantees that the seller has the right to transfer the property to the buyer through a sale. In most home sales, the warranty of the title is automatic.
If a dispute later arises concerning the property and its rightful owner or unpaid liens become known, the buyer can use the warranty of title to pursue the seller legally. For instance, if a contractor places a lien on the property for the prior owner’s unpaid bill, the buyer can sue the seller for the amount of the lien and damages.
However, a warranty of title can’t fully replace title insurance. It doesn’t offer the assurance that title insurance provides since there is no guarantee that the seller will be financially stable enough to cover the losses and damages from an unexpected title claim.
Who Pays for Title Insurance?
The buyer is usually responsible for purchasing the lender’s title insurance.
The seller may offer to purchase the new owner’s title insurance during the negotiation. If the seller doesn’t include the buyer’s title insurance in their offer, the buyer will have the option to purchase it themselves.
Banks and other mortgage lenders typically require the buyer to purchase title insurance before finalizing a home loan.
How Much Is Title Insurance?
Title insurance is a one-time purchase, included in the buyer’s closing costs. The amount you pay for the lender’s title insurance will vary depending on various factors, including your mortgage amount and the state you live in. In general, the cost of title insurance rises along with the size of your home loan.
In some states, like Texas and Florida, the government regulates the cost of title insurance. That means you’ll pay a fixed amount for title insurance. Other states don’t set their premiums, so buyers can shop around for the best prices on their policies.
According to Realtor.com, the average cost of title insurance is $1,000 for each policy.
Owners have the option to purchase their policy at similar rates. The cost of the policy depends on the property’s purchase price. While buyer’s title insurance isn’t a requirement, it’s certainly not a waste of money. It’s one of the best one-time payments you can make to protect your home or investment property.
For example, consider a person who buys a house and forgoes buyer’s title insurance. A few months later, a contractor places a lien on the home for sewage leakage repairs they made in 1997 for $500. Nearly 30 years later, that $500 repair bill could cost you thousands of dollars in penalties and interest. The insurance company would cover the costs if the homeowner purchased title insurance. Since they didn’t, they’ll need to come up with the money out of pocket to keep their home.
Homeowners refinancing their mortgage may benefit from a reissue rate on their home loan. The reissue rate is typically cheaper than the amount paid when you took out your original loan since there’s already an existing title policy and the insurance agency previously performed a title search.
Special Scenario: Seller Financing
Occasionally, sellers will offer to finance the buyer’s mortgage rather than requiring them to seek a loan through a bank or other financial institution. Seller financing provides certain benefits, like savings on closing costs and capital gains taxes. Buyers can benefit from more financing opportunities, especially if they don’t have exceptional credit.
While it may be tempting to lower your closing costs even more by forgoing seller’s title insurance, that’s a mistake. If you’re creating a mortgage note for your buyer, you’ll want to protect your financial interest by requiring the buyer to purchase a lender’s title insurance. That way, you have peace of mind in case any future claims arise on the property.
Increase the Value of Your Mortgage Note With Title Insurance
If you ever decide to sell the mortgage note you hold with a buyer, having a lender’s title insurance offers several benefits.
First, the transaction process is much quicker. You’ll shorten the underwriting process by three to five days, and the existing title insurance will be reassigned to the new mortgage note buyer.
Finally, title insurance will slightly increase the value of the mortgage note since there is less risk to the buyer.
Is Home Title Insurance Required?
Lender’s title insurance is nearly always a requirement when purchasing a home. The buyer will pay the lender’s title insurance cost during closing. At that time, they can also purchase buyer’s title insurance to protect their financial interests in the property.
How To Get Title Insurance?
You’ll probably receive recommendations for companies that offer title insurance from your real estate agent or mortgage lender. If the seller is providing a mortgage note to you, they may have a few recommendations, too. You can also perform your own research for a title insurance company in your area.