What is Title Insurance and Why Do I Need It?
Buying a home is a dream come true for many. However, it can be a complex process. You need to have all the documents you will need and understand the procedure of buying a home. Title insurance is among the most important investments you can make when buying a home. This article covers the details of what is title insurance and why you need it.
It can provide you with an important type of coverage at relatively little cost, and thus it is important to learn more about what this type of insurance is and why you need it.
What is Title Insurance?
As the name suggests, title insurance is a form of coverage that provides protection if problems arise regarding the property title. If you are taking out a mortgage loan, the lender will require you to purchase title insurance. It is important to note, however, that the required coverage only provides the lender with protection. Therefore, in order to protect yourself, you will also need to purchase a personal title insurance plan.
Title insurance may be purchased for a one-time fee and it remains in place as long as the person who is insured retains an interest in the property. If the insured person passes away, the coverage remains in place for as long as the insured’s heirs retain an interest in the property as well.
Why Do I Need Title Insurance?
It provides you with protection from the hidden risks that may be associated with your purchase. For example, if it is later determined that there are missing or forged documents or if mistakes were made when recording the legal documents associated with your property, you may suddenly find yourself owing back taxes or you may even discover that you do not legally own the property.
In either case, you could find yourself losing a significant amount of money. With the coverage in place, you do not need to worry about facing a financial loss because it will be covered by your insurance policy. Not only will the policy pay for your losses, but it will also pay to defend you against any lawsuits associated with the title and will help to clear up any title problems that you may face.
So, what is title insurance? It is an insurance policy that insures you against any financial loss due to title defects.
At this point, it would help to understand the basic real estate terms that relate to this type of insurance:
Title – A title is a document that proves the ownership of a home or property.
Title Search – it is a legal procedure to document the ownership history of a property before closing.
Title defects – it refers to any errors in a title that could challenge your right to property ownership.
Encumbrances – are the restrictions against property including an existing lease.
Easement – Refers to when someone else has a right to use the property or part of it.
Encroachment – Refers to when a neighbor’s property is projecting to the home you are buying. This could be a driveway or garage that spills into your compound.
Your real estate agent or insurer will explain everything you need to know. Ensure that the title search report does not have any legal issues that will affect you.
How Does Title Insurance Work?
Do you need it? Yes, you do. But first, you must learn and understand how it works. There are two types:
- The owner’s title insurance
- The lender’s title insurance
The owner’s insurance is optional but very useful. It will protect you from losing thousands of dollars should an ownership issue arise. You must pay the lender’s title insurance when buying a house.
The insurance can save you from losing your down payment. For example, an unknown party may claim ownership of your property. If they prove without a doubt their ownership, you stand to lose your home and money.
Having it will help you reclaim the money you have invested in that home. The lender’s insurance will reimburse your mortgage provider.
The title search is a crucial step when buying a home. It will help you to identify any title defects and ownership claims. But, defects can arise even after you have purchased a home.
What Type of Title Defects are Covered?
Someone can claim ownership of the house you bought. Imagine how scary it would be if you didn’t have title insurance. Or the previous owner has an outstanding loan with the house as security.
Here are some of the things the insurance covers:
- Unknown liens
- Omitted heirs
- Public records error
Creditors and lenders have a right to foreclose a property that has an outstanding loan. If the previous homeowner has defaulted their loans, it is possible to lose your home. Having the insurance will protect you and reimburse your investment.
Omitted heirs can also claim the right to property ownership even though it has been sold. If they do not receive a share, they can claim your home. Title coverage will take care of this scenario too.
It is not uncommon to find errors and discrepancies by the state public records office. In this case, your insurer will handle this case or reimburse your funds.
You will also get protection you from fraud. For instance, your home seller may not be the rightful owner and could have forged a signature.
How Much Does Title Insurance Cost?
The good news is that you only pay a one-time fee! Prices vary based on location and lender. In my area, the cost is ~$400. Keep in mind it will protect you from any unknown issues that threaten your homeownership.
The coverage is valid as long as you own the home.
Why Do I Need Title Insurance?
Homeownership brings joy and a sense of fulfillment. But, it is a lengthy and complex process. A lot of issues could arise to challenge your right to homeownership. Having title insurance is an excellent idea if you are a conservative person. But note that your insurance will only cover issues that arise after buying the home.
Thus, you must be careful when running the title search. Work with your insurer to identify any legal issues before you sign the deed. If your insurer points out defects on the title, have them handled immediately. Your insurer will not compensate for shortcomings you knew of when buying the house.
Only a few homeowners will claim reimbursement from such issues. It is unlikely that you will need this title insurance, but it is better to be safe.
If you are buying your house without a mortgage, you do not need a lender’s title insurance. Some states need the home seller to pay the owner’s title insurance for the buyer.
You can also choose not to have the owner’s title insurance. But, it will give you peace of mind knowing that your finances and homeownership are insured.
Besides, a one-time premium could save you thousands of dollars. It may seem unnecessary until you are on the verge of losing your finances or home.
Title Insurance FAQs
Understanding how title insurance works is a crucial step. Speak with your real estate agent and do your research on title insurance and closing.
Below are 13 title insurance FAQs to get you started…
What is a title?
A title is a document that shows you own a home or property. Homebuyers must conduct a title search before closing the sale. This will highlight the names of the previous owners. A title search will also identify any legal defects with the property at hand.
You will receive your home title after paying for the house.
What does the title insurance exclude?
Title insurance will cover you from losing money following a title defect. There are two types of title insurance, owner’s title insurance, and lender’s title insurance.
The homebuyer will pay for both premiums. However, the owner’s title insurance is an optional policy, while the latter is mandatory.
It will cover any unknown defects that arise after closing. If you were aware of the shortcomings, your insurer would not compensate you. Thus, read the title search report and ask the insurers if there are errors and discrepancies.
The insurance will only compensate you for the money invested in the house. But it is not an insurance cover for the house and thus does not insure homes against fire or damage.
What does the title insurance cover?
It covers a homeowner from unknown defects on the home title. It will defend and shield you from title issues such as:
- Forgery and fraud-related cases
- Failure of a co-owner to sign the home sale deal
- Unknown easements
- Omitted heirs
- Survey errors
- Conflicting wills
- Ex-spouse claims
- Unpaid child support
- Incorrectly recorded documentation
- Foreclosure due to existing loans the seller failed to disclose
What is an owner’s title insurance?
An owner’s title insurance policy protects a home buyer from losing the house or money. It is a one-off payment that will defend you against legal claims of homeownership.
The policy will remain valid until you decide to sell your home.
Owner’s insurance is a great way to ensure that you do not lose property or the money you paid for the house.
Your insurer will defend you in court or decide to reimburse you. This is especially when there is a possibility of losing to the legal claims.
What is a lender’s title insurance?
The lender’s title insurance protects your mortgage. The policy will cost you an average of $500, once again a one-time payment, and depending on your locale and lender, the cost could be higher or possibly even a bit lower.
Who pays for the title insurance?
The home buyer will pay both the lender’s and owner’s insurance. This is only if you have a mortgage. Buyers without a mortgage provider may not pay for the lender’s insurance.
Some states will recommend the home seller pay for the owner’s insurance.
Do I need title insurance?
It is unlikely that you will ever have to need title insurance. But, for your peace of mind, title insurance will insure your finances. Only about 3-4% of claims are made in the USA.
If you fail to pay for the owner’s insurance, you could lose both your money and the house. Besides, it is only a one-time payment, and it is valid for as long as the house title has your name. Investing a few hundred dollars to protect tens of thousands of dollars is a brilliant idea.
You need it against fraud, unknown liens, heirs, and other title defects. Understand that this is only if these issues arise after the sale and not show in the title search.
Is the title insurance the same as homeowner’s insurance?
No, the homeowner’s insurance insures your house against damage. For example, your home insurer will compensate you if a natural disaster or fire damages your house.
The insurance will insure you against another person’s claims of ownership. It could be an omitted relative or a creditor seeking to foreclose your house due to a defaulted mortgage or loans.
Is the title insurance transferable?
Both the lender’s and owner’s title insurance policies are valid for as long as you own the home. Thus, if you sell your house, the policy becomes invalid. The new homeowner will have to pay for both policies. The same case goes for people who transfer the house to a relative.
Note that the insurance will only protect you. It is not a home insurance cover.
Do I still need to buy title insurance if I am refinancing?
You will still need to pay for the lender’s title insurance when refinancing. However, the owner’s insurance will stay valid. If you had not bought the owner’s insurance when buying the house, it would help to refinance.
The owner’s insurance is valid until there is a legal change of homeownership.
Can I choose my insurer?
The Financial Protection Bureau directs lenders to provide a list of insurers. Your agent will also help you find a suitable insurance company if you desire.
Now, it is up to you to research the companies before selecting one. You can visit the insurers to get the answers you might need before insuring your investment.
Do I pay the title insurance premium before or after the closing?
You will only pay the insurance premium during closing. Your insurer will put the tab in your escrow, and you can pay when paying for the house.
What happens if I don’t have an owner’s title policy?
The owner’s title insurance defends you against people or creditors claiming ownership.
Your insurer can reimburse the funds you have invested in the house. Or they can challenge your opponent in court to prove that you are the legal owner of the property.
If you do not have the owner’s title insurance, you stand to lose your investment and your home. Else, you will have to hire a real estate lawyer to defend you in court. In the case that you fail to prove your right of ownership, you will lose your home. You will also not get any compensation regarding the finances you have invested in the house.
Georgia Title Insurance Options
In Georgia, there are 2 types: Lender Title Insurance and Owner Title Insurance.
- Lender Title Insurance (LTI) protects the lender, is for the amount financed, and is required as a condition of the loan.
- Owner Title Insurance (OTI) is optional, a one-time expense, made available at closing, and remains in force as long as you retain an interest in the property (it also remains in effect if heirs retain an interest after the original owner has died)
Technically, OTI is not required. However, I recommend all my buyer clients get it to ensure they are protected in-case an unknown risk such as forged documents, public record mistakes, title defects, and even back taxes and/or liens comes to light after they have purchased the property. In some cases, it may be determined they do not legally own the home. Having OTI will help alleviate title issues that arise, pay for a lawsuit defense if necessary, and protect the buyer from financial loss up to the policy dollar amount.
Note: If the previous owner had OTI, there is the possibility the new owner can get a re-issue rate at a decent discount, with the new policy re-issued in the new owners name.
Final Title Tips
When purchasing a new home, there will be many types of insurance that you will be required to purchase as well as ones that are optional. One form of insurance that is both required and optional is title insurance. It can provide you with an important type of coverage at relatively little cost, and thus it is important to learn more about what this type of insurance is and why you need it.
Buying a home is exciting, but don’t forget to do your research. If you are working with a real estate agent, ask about the title insurance companies. A title search will show any defects and inconsistencies in the ownership history. The title insurance agent will help you identify these defects before closing.
It is wise to have the owner’s insurance, just in case of any defects after closing. Speak with your real estate agent to know which options meet your needs the best.
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