What's in this article?
If you’ve done some digging into the types of fees that are included in closing costs for a mortgage, you’ve likely noticed title insurance is on the list.
This type of insurance offers protection to lenders and homebuyers in case any title disputes pop up during or after the sale of a property.
But what exactly is a title? And why do you need protection? Let’s take a look at how title insurance works, what types are available, and what this coverage entails.
What is Title Insurance?
When you purchase a home, the seller transfers the title to you. These are your legal rights to the property.
However, lenders and homeowners need protection in case the seller doesn’t actually own the property, and the title is not “clean.”
What is a Clean Title?
A clean, or clear, title has no liens, boundary disputes, easements, or other ownership issues.
A mortgage lien is a claim to the property, meaning if the owner stopped making payments or defaulted on the loan, their lender can take the home to settle the debt.
The bottom line: If you don’t have a clean title when you purchase the home, you then will become responsible for any ownership issues.
That’s where title insurance comes in. This insurance offers protection to lenders and homeowners in case any title disputes occur.
Depending on the policy, instead of you taking responsibility for the legal damages, the title insurance company may be responsible.
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How Does Title Insurance Work?
As a prospective buyer, you are free to check on the title yourself online or at the local property records office, but not all the information will be available to you.
That’s why title searches are a part of the mortgage loan process. When you are getting a mortgage, the loan officer will work with an attorney or title company to perform a title search.
Borrowers generally will be asked to pay the fee for this search as part of the closing costs.
What Types of Issues Can Arise from a Title Search?
Title companies will search the following public records to uncover any defects:
- Tax records
- Court judgments
- Child support orders
- Divorce decrees
- Zoning laws/disputes
Confirming a clear title means the person selling the property owns it and has a right to sell it.
If, during this search, the company discovers an issue, they will bring it to your attention. Then, they will assess the risks of the issues and craft a title insurance quote based on these risks.
If there are too many risks, the company may refuse to offer a policy.
Remember, issues may occur later on as well. For example, years later, a person could claim they own the property and that it should not have been sold to you.
Title insurance will help protect you and the lender in case these types of issues arise.
How to Purchase Title Insurance
Your loan officer will typically require you to purchase their lender’s title insurance. This insurance can cover the full value of the mortgage if defects are found.
The other type of coverage is owner’s title insurance. This type isn’t required, but it will protect you in case title or ownership issues occur at a later time.
If there happened to be a successful claim of ownership by someone else, the title insurance company would pay your outstanding loan balance and equity up to the purchase price.
There are certain issues an insurance company will not cover, though, so be sure to ask what is and isn’t covered, and what could happen if it’s not.
How Much Does Title Insurance Cost?
Prices for title insurance vary by state, so be sure to discuss these costs with your lender and the title company.
The lender’s policy is based on the loan amount, while the owner’s policy is based on the home purchase price.
The American Land Title Association has both policies estimated at around 0.5% to 1% of the home purchase price.
The cost is an upfront, one-time fee that will protect your property rights the entire time you own your home, so it’s considered a worthwhile investment.
Why Does My Lender Require Title Insurance?
As with most types of insurance, you’re paying to protect something that may not happen. This can leave some borrowers not understanding the worth of such a purchase.
While you have the freedom to decline an owner’s policy, a lender understands and has likely witnessed the risks involved, which is why they require a lender’s policy.
However, the protection an owner’s policy also offers can save you from having to pay a previous owner’s unpaid bills, or even from losing the right to live in your home.
The following are some other protections afforded to you:
- Building code violations from previous owners
- Survey errors on property
- Property deed errors
- Boundary disputes
- Conflicting wills
- Former owner’s unpaid child support
- Liens from contractors, previous lenders, or taxes
- Claims from unknown heirs or ex-spouses
- Improperly recorded documents
You can purchase title insurance from whichever company you’d like, although your lender will likely have recommendations.
In some states, you may be able to shop around to find the best prices and coverage.
Start the Home Buying Process with Homefinity
A successful home buying experience starts with a qualified, trustworthy loan officer.
Connect with the lending professionals at Homefinity today to get pre-approved for a loan.
We will help you throughout the lending process with whatever level of guidance you prefer, including thorough explanation of all closing costs involved.
If you have any questions about the process or about title insurance, reach out to our team. We look forward to starting the process with you.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
*Pre-approval is based on a preliminary review of credit information provided to Homefinity, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.