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HOW TITLE INSURANCE WORKS IN REAL ESTATE

When you’re buying a home, the topic of Title Insurance is sure to come up – but what is it, and how can it protect you as a new homeowner? Read on to learn the basics of Title Insurance.

Marino & Marino, P.C.   Source: RisMedia
When buying a home, you might wonder what title insurance is and how it works. As with any insurance, it protects against loss, and this insurance relates to issues with the title of the home you are buying.

What is title insurance?


This insurance protects home buyers and mortgage lenders should there be a problem with the title that causes a financial loss. There are two types of insurance policies for the title; one is lenders’ title insurance which protects the lender through the buyer paying for it.

Owner’s title insurance offers protection for the buyer. It is an optional expense a buyer can pay for as part of their closing costs.

How does title insurance work?


Before a real estate sale closes, the property must have a clear title. Title companies run searches to find claims against the property.

Public records will be searched to confirm the seller’s ownership and uncover any claims on the home. As well as claims or liens on the property, building code violations, or other issues could stop the title from being clean.
Title insurance coverage can protect buyers and lenders should there be a defect in the title or disputes over the ownership.

Claims could be filed against the title for liens, back tax assessments, easements, lines of credit, or disputed wills. While insurance normally protects against things that could happen, title insurance deals with things that have happened in the past.
Insurance on the title covers buyers and lenders for the following issues:
  • Ownership claims from another party

  • Errors in the records

  • Forgery or fraud in documents

  • Judgments against the property, like liens and lawsuits

  • Unrecorded easements and covenants that could restrict the use

The two types of title insurance


There is lender’s and owner’s title insurance. Most of the time, the lender will require that the buyer pays for the lender’s title insurance.

This insurance policy will protect the lender’s interests should there be an issue with the title at any point. When this policy is issued, it shows that the title search has been completed.

Even though the title search hasn’t found any issues, don’t assume that there isn’t any risk. The title could still have hidden defects that could cause you problems later.
Since there is still a risk of financial loss, the owner can buy their own title insurance. The risk to a homeowner increases as they gain more equity in the home, where any claim made would result in a larger percentage being the owner’s responsibility.

When a title defect is discovered, and the owner does not have coverage, the closing time frame can be substantially delayed.

The cost of title insurance


Title insurance is purchased at closing, with the closing or escrow agent starting the process. There are four major title insurance underwriters and regional companies to choose from.

The cost of title insurance can vary considerably depending on your chosen underwriter and location. You can expect your title insurance to cost between $500 and $3,500.

Usually, the policy for the lender and the owner have to be purchased together. This ensures that there is protection for both parties involved in the purchase.

On closing day, the insurance policy is purchased as a one-time payment. Though you might get recommendations for which underwriter to choose, it is better to compare options for yourself. There is also a law preventing sellers from pushing a particular insurance provider.

Why is having insurance for the title important?


If you don’t have insurance on the title, and there is a defect, you and your lender could face a serious financial loss. If there are unpaid property taxes, it will be up to the buyer to pay them.

They could lose their home if they cannot pay the tax bill.

When title insurance has been paid, it protects you for as long as you own the home. The lender is also protected against issues in the title that were unrecorded.
If a borrower defaults on the mortgage, the lender can claim this insurance if there is an issue with the title.

For investors buying homes in foreclosure, having an insurance policy for the title is even more important. There might be other issues with the home than just the foreclosure, and title insurance will protect against potential claims.
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