What Is Title Insurance When Buying A House?
Title insurance is a standard and necessary process that you have to follow before buying a mortgage. In fact, it is one of the fees that make the closing costs when you take out a loan. But what really is title insurance or just title? Well, this indemnity is a cover that protects both the lender and the buyer from any claims that failed to show up during the title search by any third-party entity. According to Investopedia, a just title is required because it identifies the property's owner. A title search is necessary to ascertain that the designation is clear, meaning that the homeowner is the only proprietor and no other third party can claim the house. Several scenarios could cause a claim to a particular property.
A good example is purchasing a property that a creditor seizes as a legal asset or a house with a backlog of previously unpaid taxes. Different from other types of insurance that are purposely meant for protection against future events, title insurance works to cover property buyers and lenders against past events. So is title insurance a must? How does it actually work? Well, if you are asking yourself such questions, this post is for you. Read on to find out more.
How the title insurance works
Purchasing property is very expensive; you wouldn't want to get yourself into unnecessary title invalidation problems, especially when a lot of money is on the line. Title insurance works by providing the funds to pay off a previously undiscovered claim or covers the cost of legal defense in case anyone files a lawsuit challenging ownership of the said property.
As mentioned before, title insurance will not protect you against future problems, for instance, when you fail to pay your property taxes. Nonetheless, title insurance is one of those prerequisite verification processes that you ought not to skip when buying property. A title company is a third-party player that is responsible for giving you title insurance. Rocket Mortgage mentions that such companies offer title insurance depending on the outcomes of the designation search, often referred to as the title abstract.
The company will then present you with a quote depending on the specific risks associated with that particular title. Of course, a title company might not issue any kind of insurance if there are too many claims or problems with the ownership.
How the preliminary report works
The findings of the title search inform a preliminary report. This search is done either by a title company or by a real estate attorney on behalf of the property buyer and the financial lender. In addition, an abstractor who might be from an insurance company is responsible for going through the public land records looking for claims concerning the property, for instance, court judgments, wills, or even previous tax records, TIAC explains.
Remember, it is possible to do your own title search; however, you will not benefit from expert opinion. The subsequent preliminary report gives all the key players a chance to assess whether to go forward with the purchase or look for alternatives. The good news is that most sellers choose to take care of any claims that show up during the title search. Some will offer a discount on the property prices just to make up for the existing liens.
Types of title insurance
There are only two title insurance types meant to protect the two major players in any property transaction — the buyer and the lender. Since there are two major players, the two separate indemnities include the owner's title insurance and the loan policy, also referred to as the lender's just title.
The lender's title insurance is often a requirement from your financial creditor before getting the loan. This indemnity is meant to protect the lender from any financial losses in the event title issues arise. There is no fixed amount when it comes to the lender's insurance cost; it all depends on the size of the loan requested and the loss of the state. On the other hand, the owner's title insurance is meant to protect the buyer from previous title claims that may come up later. The particular amount payable usually depends on the property's purchasing price.
You should also know that the seller or the buyer can both purchase this insurance. Unlike the lender's title insurance, the owner's title insurance is not mandatory; nonetheless, it is worth having this cover. According to the Consumer Financial Protection Bureau, you will likely get a discount if you use the same title company for both title insurances (owners and lenders).
Cost of title insurance
Unlike other types of indemnities that are payable in terms of monthly or yearly premiums, title insurance is a one-time fee paid upfront. However, you should be aware that different states handle the just title issue differently.
For example, some states like New Mexico determine how much title companies will charge for this insurance. On the other hand, other states give title companies the freedom to alter the said fees. Generally, according to the American Land Title Association (ALTA), the owner's title insurance, on average, costs 0.5% of the purchasing price of the house.
When combined, the two title insurances can get up to 1% of the home's purchasing price. There are plenty of options when it comes to where you can get title insurance from. While you can get recommendations from real estate agents or from referrals, you must shop around for the best terms. However, if you don't know where to begin your search, the American Land Title Association (ALTA) registry is a good place to start.
Is it worth having title insurance?
Right off the bat, we must emphasize that almost all borrowers will require you to get a lender's title insurance before giving you a loan. With that said, the big question is, do you need both policies, though? The owner's title insurance is not mandatory; you don't want to be responsible for any title issues that might emerge in the future.
On the other hand, failure to have an owner's title insurance will mean that you are willing to take any financial responsibilities in the event of a dispute which can be quite expensive (via the Texas Department of Insurance). Think about paying all the taxes that have gone unpaid over the years! Regardless of how thorough the title check is, it is not proof enough that the ownership is clear; thus, it is necessary to have insurance that protects you as the buyer.
If a lost relative shows up with old paperwork claiming ownership of the property, hopefully, the insurance will defend your claim. However, if by any chance the case is lost, the insurance policy will reimburse the lender the loan amount relieving you of any financial burden. So, while you may have to leave the house, the title insurance policy will cover your financial losses.