What Is Title Insurance & Is It Important?

Wendy WilsonAugust 24, 2021

Title insurance is a form of insurance one obtains to protect themselves if unexpected damages and loss occur to the home they own. Title insurance protects the lender, and it’s a one-time charge premium. To protect yourself, you can also purchase the owner’s title insurance.

What is Title Insurance?

When you buy property, you receive a document called “Title.” The title states your homeownership rights. Title insurance protects these rights against any third party who challenges your ownership. Title insurance also covers any financial loss from defects in the title. Defects can occur anytime, even after years of peaceful ownership.

Before closing your home loan, a clear title will be necessary. A clear title shows that the current owner, who is also the seller, has complete property ownership. Therefore, your mortgage lender will order a title search using a title company that will search for public records related to the property.

The search is to help determine and confirm legal ownership of the property. Additionally, the search helps find any defects that could affect future property rights. These defects could be in the form of liens or encumbrances.

In case the title search reveals a problem, the title company will try to resolve it. However, some issues may be so significant that they derail sale of the property.  What happens If the title search doesn’t reveal any problem or title defect?  You still need to buy title insurance as title searches are not faultless.

There is still a risk of financial loss from undiscovered issues. These issues could dispute the property’s ownership. Therefore, there is a need for additional protection even years after purchase.

Types of Title Insurance

Title insurance is not a monthly premium that adds to your mortgage premium. Instead, title insurance is a one-time upfront cost. There are two types:

Lender’s Title Insurance

Lenders require that a borrower buys a lender’s title insurance policy. The policy protects the lender from financial loss.

• Is lender’s title insurance negotiable? – No, you have to buy the policy anytime you take out a mortgage.

• Is lender’s title insurance required for a refinance? – Yes, you must buy a new lender’s title insurance policy when refinancing. The requirement applies even if using the same lender for the new loan. However, a discount may be available if refinancing when your loan is not more than ten years old.

Owner’s Title Insurance

The owner’s title insurance is optional. The policy protects the homebuyer’s equity in the property. Furthermore, the policy covers the buyer’s right to live in the home even if a claim arises after purchase.

• Do you need the owner’s title insurance for a refinance? – You only buy the owner’s title insurance once. The policy stays in effect even after refinancing as you still own the same property.

• Do You Need Owner’s Title Insurance? – You may want to skip the owner’s title insurance policy to save money. Many buyers may not consider the policy, especially if the search reveals no defects.

However, ownership of real estate isn’t always as simple. There may be issues that may later challenge ownership of the property. A title defect after closing your mortgage could come with legal costs. You also risk losing your home as well as your financial investment. The title insurance policy protects against both financial loss and your home.

Some of the undiscovered issues could include;

• A mistake in the ownership history
• An oversight by the title company
• A previously unknown heir
• A pending lawsuit or legal judgment
• Fraud

Owner’s title insurance protects against the following;

• Survey errors
• Boundary disputes
• Unpaid property taxes
• Property deed errors
• Conflicting wills
• Forge power of attorney
• Encroachments
• Third-party ownership claim
• Forgery and fraud
• Flawed records
• Encumbrances

As a buyer, the owner’s title insurance protects you for as long as you own or have interests in the property.

How Much Does Title Insurance Cost?

Sometimes, a homebuyer may negotiate and have the seller pay for the title insurance cost. However, the policy doesn’t cost much. The fee ranges between $500 and $ 4,000 but varies from state to state. The cost also varies with your insurance provider and your home’s purchase price.

Some states, such as Texas, regulate insurance rates. Therefore, there may not be a significant cost difference among insurers. In other locations, however, title insurance can be an outstanding closing cost.

To prevent extortion, RESPA prohibits requirements by sellers to purchase from a specific insurer. Lenders need to provide a list of title insurance providers in the buyer’s area. The buyer is also not restricted to the lender’s list. The buyer is free to shop around for coverage of their choice.

What Is the ALTA Homeowner’s Policy of Title Insurance?

There are two ALTA-certified owner’s title insurance policies. They are; the owner’s policy and the Homeowner’s policy. The owner’s policy protects against title defects and liens. The protection lasts through the title’s history to the time it gets to the public records.

The homeowner’s policy, however, takes your protection a notch higher. Homeowner’s policy provides coverage for additional risks. Some of these risks might occur after recording the deed.

The Homeowner’s policy protects you for as long as you or your beneficiaries own the property. Some of the additional coverages you enjoy with a Homeowner’s policy include;

• Building Permit Violation Coverage. It applies when you have to remove a structure built by a previous owner but without the required permits.

• Subdivision Map Act Coverage. Applies if land subdivision took place before purchase. Due to the improper subdivision, you are unable to close a sale or secure a loan.

• Location Coverage. Ensures the property has a similar address as the home insured in the policy.

• Restrictive Covenant Violations Coverage. Protects against loss of title through attempts to enforce a restrictive covenant.

• Zoning Coverage. Protects if forced to remedy a structure violating zoning laws.

• Post-Policy Coverage. This coverage protects against post-policy ownership claims. These claims could be a result of forgery or encroachment.

• Encroachment Coverage. Protects against a third party building a structure that encroaches on the property.

• Supplemental Taxes. Protects against such taxes for construction or change of use

• Coverage for Structure Damage from Extraction of Minerals, Water, and Other Substances

• Automatic Coverage Increases

• Living Trust Coverage

What Is an EPA Endorsement Title Insurance?

EPA Endorsement is ALTA’s Environmental Protection Lien. The endorsement protects the insured against damages on their residential property. The damages have to be due to environmental liens not declared as exceptions to the title policy.

Conclusion

Title insurance is a little known and underutilized protection against losses that come from defects in the title. Although policies are specific to the state, the concept of title insurance stays the same. It seeks to protect both the buyer and seller from losses they may suffer due to undisclosed or defective title.