If you’re considering purchasing a home you may have heard your real estate broker or lawyer mention something called “title insurance.” It may have been mentioned in the context of the closing costs of your mortgage, or perhaps in the context of performing a title search. Home buyers can compare title insurance policies or they can choose the default policy used by the lender.

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By definition, title insurance is an indemnity product designed to protect both lender and owner against financial loss in the case of title defects or unknown liens. The various states have different regulations regarding the necessity and cost of title insurance, as do lenders. Home buyers would do well to understand the regulations in their state when considering purchasing title insurance.

Three Types of Title Insurance

When it comes to title insurance there are three basic policy types: an owner’s policy, a lender’s policy, and a construction loan policy. All three policies are designed to cover the various parties involved in buying and selling real estate. We’ll begin our discussion with the lender’s policy, as this is the one most people are familiar with.

Lender’s Insurance:

Almost every state requires lender’s title insurance by law. A lender’s policy protects your mortgage lender against financial loss in case there are any title defects or outstanding liens that were not uncovered during a title search.

For example, if there are unpaid taxes due on the property, and the title search did not make those known, the mortgage lender needs to be protected in case the government seizes the property to pay taxes. The policy will cover the lender up to the value of the mortgage.

When you purchase a home, lenders will sometimes pass the cost of title insurance on to the home buyer. This cost is absorbed as part of the standard closing costs. It is generally a negligible amount, but it is an added cost nonetheless. You will most likely have no say in the policy your lender chooses.

Owner’s Policy:

The owner’s policy is usually a single fee policy purchased with the understanding that the title search company performed all due diligence in making sure the property title is free from defects. The owner’s policy protects him against loss in case circumstances at a later date dictate his property is unmarketable, or it is determined he has no legal access it.

The typical owner’s title insurance policy will cover him up to the purchase price of the property. Additional endorsements can be added to these policies to protect against other contingencies your real estate broker or attorney may be aware of. A policy will remain in force as long as the owner or his estate retains an interest in the property.

When it comes to the owner’s policy, this is where you are free to compare title insurance rates. While most people tend to rely on the standard policy recommended by their attorneys or real estate brokers, you do have the right to do your own research and purchase your own policy. One of the best parts of owner’s title insurance is that the single fee paid at the time of the title search keeps the policy in force with no future payments required.

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Construction Loan:

The third policy, known as the construction loan policy, is a separate policy that exists for properties in which construction loans have been obtained. Not all states have a construction loan policies; sometimes the conditions of a construction loan policy are met in the owner’s or lender’s policies. The construction loan policy is a supplemental product increasing the value of existing coverage due the fact that construction loans have increased the value of the property.

The Low-Risk Nature of Title Insurance

As you compare title insurance policies and rates, you may be surprised at how little it costs. The reason for this is the fact that title insurance is a relatively low-risk policy for insurance companies to provide. Since the mid 1800s, state and local governments have done an exceptionally good job in maintaining land ownership records, making it uncommon to find deficiencies in property titles in the U.S.

Title insurance is such a low risk in fact, that industry experts estimate title insurance companies pay out 5% of the total premiums as opposed to the 70% paid by auto insurance companies. Since insurance is all about risk and loss, insurance companies are able to provide substantial coverage if the risk of loss low. Such is the case with title insurance.

The Need for Title Insurance

Title insurance for the owner is given out for the exact amount of purchase of the house. It is purchased for a surcharge that lasts as long as you and or family have interest in it. The amount you are charged can vary between states, but is generally about 1% of purchase price of the house or land. This is according ALTA, the American Land Title Association. According to the California Land Title Association, for example, the price of the owner’s title insurance can be anywhere from $1200- $2000.

If a problem arises with the title that didn’t come up during the title search, your owner’s title insurance is there to protect you, as well as pay any and all legal fees that may be incurred.

A records search can bring up just about anything you want to know about your house or property. The surcharge mentioned previously is earmarked for administrative charges for searches at large research facilities. Here, information about the history of houses and land is stored specifically for this purpose. In some parts of the US, the “chain of title” can date all the way back to the 1800s. Short searches are the most common when it comes to residential dealings, which includes pursuits that are usually between one and three deeds back in time.

Since claims against property titles are so rare in the U.S., you may wonder why title insurance is necessary. It’s necessary because potential litigation could not only cost the homeowner or lender their investment in a specific piece of property, but fees and added expenses can cause substantial losses over and above what either party has already invested. Unpaid property taxes are just one example.

Let’s say a title search failed to uncover ten years of unpaid property taxes. Those taxes could be a substantial amount when fees and penalties are added.

On a $70,000 home, the combination of unpaid property taxes, fees and penalties, attorneys’ fees, and court costs could exceed the value of the mortgage. In such a case, the owner or the lender could lose their entire investment and still have a bill to pay afterward. So while title insurance from the owner’s standpoint is not necessary, it’s a good idea that costs very little money.

Lender’s title insurance is required in many states, if the mortgage is to actually be closed. However, the lender’s type of title insurance has a cap on it that protects the lender only up to the actual amount of the mortgage, but doesn’t do anything to protect your own equity in the house or land.

The limits of a home owner’s title insurance policy vary from state to state, as well. A home owner’s policy will defend the entire worth of your home, including what you already have financially put into the house or land for less than a few hundred dollars. Additionally, sellers will pay for the owner policies themselves, just to show the buyer good faith on the title, while some borrowers have to add it on to their lender’s title insurance policy.

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Comparing Title Insurance Rates

Tips for saving money on title insurance:

  • In many states, it’s a requirement that the seller pays for your title insurance policy. If not, it can be negotiated during closing, or you can simply ask them to do so.
  • Ask the closing attorney or title insurer if you can have the current title reissued. This can save literally save you hundred of dollars, but you must ask, because no one will offer this to you outright.
  • If there are exceptions on the title insurance policy you purchase, ask the title insurer or mortgage lender if they can be removed from the policy.
  • Title insurance pricing varies from state to state. In some states you are able to shop around for the best pricing, while in others it’s controlled tightly by the state, and you won’t see much difference, if any.

Some states don’t regulate title insurance rates, so you are free to comparison-shop. They are: Alabama, West Virginia, Washington DC, Hawaii, Oklahoma, Illinois, Massachusetts, and Indiana. Other states require approval for title insurance rates, but you are still free to shop around. These states are Pennsylvania, New York, Ohio, New Jersey, and Delaware. Florida sets its title insurance prices. Don’t even bother comparison shopping in New Mexico and Texas, where the state governments legislate the pricing for all title insurance companies in these states.

Fortunately, most states regulate title insurance on a “file and use” basis. This means that insurance providers must file their rates with the state government, but they are still free to set them as they see fit. “File and use” states are second only to unregulated states in the variety of rates available. Examples of unregulated states include Alabama, Indiana, and Oklahoma.

If you’re buying a new or second home, expect the issue of title insurance to come up. You are free to choose the default policies offered by the lender, and in most cases those policies are suitable. But if there are any extraordinary conditions pertaining to the property you’re purchasing, make sure your title insurance will cover you against any possible issues.

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Case Studies: Title Insurance Comparison

Case Study 1: Protecting Against Hidden Liens

In this case, a homebuyer named Sarah purchased a property without obtaining title insurance. After a few months, she discovered that the previous owner had outstanding liens against the property that were not disclosed during the sale. Without title insurance, Sarah was responsible for paying off these liens, which amounted to a substantial sum of money.

This case highlights the importance of title insurance in uncovering hidden liens and protecting homebuyers from unforeseen financial burdens.

Case Study 2: Resolving Boundary Disputes

John and Lisa, a married couple, decided to purchase a house located in a quiet suburban neighborhood. Shortly after moving in, their neighbor claimed that a portion of their backyard actually belonged to him based on an old survey. Without title insurance, John and Lisa would have faced lengthy legal battles and potentially lost a significant portion of their property.

Fortunately, their title insurance policy covered the costs of resolving the boundary dispute, ensuring that they retained ownership of their entire backyard.

Case Study 3: Uncovering Forged Documents

A real estate developer named Mark was considering purchasing a large plot of land for a new housing development project. Before finalizing the purchase, he decided to obtain title insurance. During the title search, it was discovered that several key documents related to the property’s ownership had been forged.

Without title insurance, Mark would have been at risk of purchasing the land under false pretenses. The insurance company’s investigation and subsequent coverage saved Mark from a potentially costly investment and legal complications.

Case Study 4: Identifying Undisclosed Heirs

Robert and Emily inherited a family property but later discovered undisclosed heirs through their title insurance policy. The insurance company assisted them in resolving the situation while safeguarding their ownership rights. This case demonstrates the importance of title insurance in protecting against unexpected claims and securing rightful ownership of inherited properties.

Case Study 5: Safeguarding Against Fraudulent Transfers

A business owner named Michael was in the process of purchasing a commercial property to expand his operations. Before closing the deal, he obtained title insurance to protect his investment. During the title search, it was discovered that the seller had recently transferred the property to a relative in an attempt to defraud potential buyers.

Thanks to the title insurance, Michael was able to cancel the transaction and avoid a significant financial loss. This case demonstrates the value of title insurance in detecting fraudulent activities and safeguarding against unscrupulous sellers.

Case Study 6: Mitigating Prior Ownership Issues

In this case, a couple named David and Jennifer were interested in purchasing a historic home. As part of their due diligence, they obtained title insurance. The title search revealed that the property had changed hands multiple times over the years, and there were potential ownership disputes from previous generations.

The title insurance company resolved the outstanding issues and provided David and Jennifer with the confidence to proceed with the purchase, knowing that their ownership rights were protected. This case emphasizes the role of title insurance in mitigating potential risks associated with complex ownership histories.

Case Study 7: Addressing Incorrect Legal Descriptions

A homeowner named Rebecca had been living in her house for several years without title insurance. When she decided to refinance her mortgage, the lender required her to obtain title insurance. During the process, it was discovered that the legal description of her property contained an error, which could have created significant problems in the future.

The title insurance company rectified the issue and ensured that Rebecca had a clear and accurate legal description for her property, protecting her investment and preventing future disputes.

Case Study 8: Dealing with Unresolved Tax Liens

In this case, a real estate investor named James was considering purchasing a foreclosure property at an auction. However, before finalizing the deal, he decided to obtain title insurance. The title search revealed multiple unresolved tax liens on the property, which could have made James liable for paying off the outstanding taxes.

With the help of title insurance, James avoided a potential financial burden and was able to negotiate a reduced purchase price based on the discovered liens. This case underscores the importance of title insurance in identifying unresolved tax obligations that could impact property ownership.

Frequently Asked Questions

What is title insurance?

Title insurance is a security policy that protects you and your lender from issues related to the property’s title before the policy is issued. It covers potential problems like past title forgeries, unpaid property taxes, and property liens.

How does title insurance differ from other types of insurance?

Title insurance focuses on past issues that may affect you now, while home insurance and car insurance primarily address potential future problems. It provides protection against unforeseen problems with the property’s title.

What are the different types of title insurance?

There are three types of title insurance: owner’s title insurance, lender’s title insurance, and enhanced owner’s title insurance.

How does comparison shopping for title insurance work?

Comparison shopping allows you to compare quotes from different insurance providers to find the best price and coverage for your title insurance. Some states regulate title insurance rates, while others allow you to freely shop around.

Are there any tips for saving money on title insurance?

Yes, here are some tips:

  • Comparison shop to find the best rates.
  • Check if your state regulates title insurance rates.
  • Consider purchasing an enhanced owner’s title insurance policy for additional coverage.