Title insurance is a way to ensure that a piece of real estate has a valid title and not subject to unforeseen liens or liabilities. Before title insurance, buyers had to ensure that the title held by the seller was valid and accurately presented. If there was an error in the title, the buyer risked losing the land entirely.
Title insurance exists because of frequent inaccuracies in the recording of titles. In the United States, recording title sales with a local government has not been extensively enforced. Therefore, some titles have no concrete records of ownership. If not insured, these titles are a liability for the purchaser who risks losing the investment if a legal issue arises involving the property.
There are three main types of title insurance, although construction loan insurance is rarely used. Read on to learn about each of the three different types of title insurance and then be sure to enter your zip above for free insurance quotes!
Lender’s Title Insurance
Lender’s title insurance is issued to mortgage lenders and follows the mortgage loan if sold. When the loan is sold, this insurance ensures that the mortgage loan will be an asset to the buyer. Under lender’s policies, the mortgage loan is protected in these instances:
- The property’s title is not in the mortgage loan borrower, subject to defects or liens, or is simply unmarketable.
- The title holder does not have right of access to the land.
- The lien created by the mortgage is invalid or is not the only liability against the property.
Lender’s title insurance can also protect the title and mortgage loan against litigation. Depending on individual negotiations, the coverage provided by lender’s title insurance can include certain exceptions or encompass more situations.
Owner’s Title Insurance
This form of insurance is bought by a purchaser of real estate. This policy ensures that the title being bought is legitimately owned by the seller and is not subject to any hidden liens or other defects. Properties can be sold with liens; however, these liabilities must be known and exempted from coverage under the title insurance policy.
This type of policy often covers only the purchase price of a property. Premiums can be paid by either the buyer or seller, depending on the result of negotiations during the sale.
Construction Title Insurance
Construction title insurance is similar to owner’s title insurance with one major difference. Builders who take ownership of the property can insure the land for an incrementally increasing amount as they make improvements to the property. The policy still protects the builder from losing the land as a result of improper documentation of previous owners or hidden liens.
Policy Premiums
Each state makes unique rules as to what premiums can be charged. Some states leave all pricing decisions to companies selling the policies; others set strict rates and require that all policies are offered at that rate.
More detailed, state by state information can be discovered through further research. In 2003, according to the American Land Title Association (ALTA), $15.7 billion was taken in by the industry via premiums, but only $662 million was paid out in claims.
Most states also require service fees in addition to premiums. These service fees cover underwriting costs associated with the policies. Insurers can also require research fees to determine the true owners and status of a piece of real estate. These fees are rarely regulated and can vary greatly from state to state.
Relative Worth of Title Insurance
Although title insurance is required in many real estate transactions, the chances of an issue arising covered by the policy is fairly low. Research is essential before buying a policy.
If you are unsure about any type of title insurance it is always best to enlist the help of a professional. They can help answer any questions you might have.
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