Buying a home can be a stressful endeavor. No matter how much planning you do ahead of time, there always seem to be at least a few surprise roadblocks that pop up in the process to throw you off course. The amount of paperwork to be done and the many variables agents throw into the mix can be intimidating for first-time homebuyers.
But when an agent asks if you plan on getting title insurance, you don’t have to answer out of panic. Here’s everything you need to know about title insurance to make the best decision for yourself.
What Is A Title?
Many people assume that a title and a deed are the same thing, but they’re not.
A deed is what you sign and are given during the loan closing process. This piece of paper gives you the ability to claim ownership of your property.
The title belongs to your bank or lending agent throughout the course of the loan.
Once you pay off the loan, pending any liens the homeowner might have against them, the lending agent will issue a quit-claim deed and transfer the title over to the deed holder or holders.
The title is evidence that you own your home outright.
What Is Title Insurance?
When most people think of insurance, they think of a policy that protects them from future damages, claims, or accidents. Title insurance differs from policies like car and homeowners insurance, however, because it protects the homeowner from problems that may have happened in the past.
Some of the most common problems people face when attempting to get the title to a property include:
- Liens
- Fraud
- Forgery
- Unsettled divorce issues
- Incorrectly filed or recorded documents
- Encroachments
- Easements
- Other people claiming an ownership interest
- People who have signed the title over who are unauthorized to do so because they are a minor or mentally incompetent
Taking on the responsibility of a title means potentially facing any of these issues. Title insurance protects owners and lenders against any property loss or damages that might occur because of past instances. It does not, however, protect against any future liens or legal problems that you might encounter.
Won’t A Title Search Uncover These Past Problems For Me?
If you know what you’re looking for, you have the ability to do a title search yourself by accessing public records. Alternatively, you can hire a professional to do it for you. But if you are taking a loan out to buy the house, then your lender will require a title search to be performed by a third party.
Usually a title search will uncover major problems. If any of these problems do arise, the lending agent will notify you about them. However, plenty of issues can arise that even the most skilled title searcher may not able to find. Performing a title search does not guarantee that the title is completely in the clear. All a title search does is let the insurer know how great or minimal of a risk they are taking on by insuring you.
What Happens When A Title Search Uncovers A Problem?
If the search does find outstanding issues against the search, your agent will notify you and you will have to begin taking the necessary steps to clear any of these problems.
If these problems are unable to be resolved, the insurer will often insist that they be listed as exceptions in the policy’s coverage, much like the way medical insurer’s used to handle pre-existing conditions. That’s when you need to weigh the pros and cons and decide whether or not the property is worth purchasing.
Should I Still Get Insurance Even If A Title Search Doesn’t Uncover Anything?
As previously stated, a clear title search does not guarantee a clear title. You do not have to get title insurance if you’re paying for the property in cash. Some lenders will require you to purchase it and others will not.
There is no telling whether or not you’ll face a claim against your rights of ownership with the property. If you do, title insurance will cover the huge cost and legal fees associated with defending yourself against the claim.
Needless to say, defending the title to your property is an expensive endeavor. And if for any reason you lose your property due to these issues, the policy should cover the loss up to the amount of the policy.
When Do I Get Title Insurance?
Unlike other policies like life, house, and car insurance, you do not pay your title insurance policy over time. These policies are paid in full with a one-time fee and are generally included in closing costs.
What Kind Of Policy Should I Get?
There are two types of title insurance policies available: a lender’s policy, and an owner’s policy. Lenders generally tack on the lender’s insurance in their fees because it protects them. Each loan is made with the property as security and if the security is threatened in any way, it threatens the lender. That’s why lender’s policies only cover the amount of the loan.
A lender’s policy will not cover the equity in the property. That’s where an owner’s policy comes in. The owner’s policy covers the total amount of the value of the property when it was purchased and it protects you, the buyer, from any unforeseen claims against the ownership of your property that might arise from problems against your title that weren’t previously uncovered.
It is crucial that you read the fine print of your policy and check the exceptions. Exceptions listed will not be covered by the policy.
Most people never need or use title insurance. Like most insurance, if you ever need it, you’ll definitely be glad that you have it.
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