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| What Is Home Title Insurance – Policy Costs, Coverage & Need |
You have finally achieved the goal of owning your dream home. You have spent years saving up for it and have finally accomplished your objective. You have taken care of every detail, unpacked every box, organized your furniture, and made your first mortgage payment. Life is finally in a great place.
Suddenly, you receive an unexpected visit. A person at your door presents you with a document that appears to be official, informing you that the offspring of a former proprietor is taking legal action against you. They assert that the abode belongs to them and have the previous owner's testamentary document to back up their claim.
You are cognizant that you require the services of a legal professional. Nevertheless, after incurring a substantial amount of funds, in tens of thousands of dollars, towards the initial payment, your finances are depleted. The situation you are in is perilous, and it could deteriorate if the individual suing you is successful. On the other hand, if you possessed home title insurance, you likely would not have to bear the cost of defending yourself.
What Is Home Title Insurance?
Home title insurance, also referred to as simply title insurance, is a popular and specific form of real estate insurance designed to safeguard your financial stake in a particular property. It can be purchased for your primary dwelling, a secondary home, or any investment property that you acquire directly. However, title insurance is not required for indirect real estate investments, such as through real estate investment trusts traded publicly or real estate crowdfunding.
Title insurance, like most insurance, offers financial security against potential losses in the future. For instance, homeowners insurance provides coverage for expenses arising from harm to or theft of your home, while title insurance protects against out-of-pocket costs related to future disputes over ownership.
Moreover, title insurance covers various pre-ownership activities that take place prior to you acquiring the property. For instance, once you make an offer on a new property, but before closing the deal, your title insurance premium covers the cost of title investigation. Additionally, it covers the expenses of rectifying any title issues, such as outstanding liens or ownership disputes, before they escalate and result in greater financial harm.
What Does Home Title Insurance Cover?
Title insurance typically encompasses three elements:
- Reimbursing the cost of examining the historical ownership records of the property being insured.
- Paying for any rectifications uncovered during the investigation.
- Bearing future legal costs for any litigation against, or attempts to seek compensation from, the current owner that arise from any unnoticed problems.
Title Search
Despite variations in title insurance policies across states and providers, they always encompass the cost of performing a title investigation. This entails a meticulous inspection of public records related to the property in question to determine if any title issues exist. These records are usually kept at the city or county where the property is situated.
The objective of a title investigation is to review the entire property history, starting from its initial platting or division. This is usually achieved by analyzing the property's abstract, a document that holds all ownership records and historical liens.
A thorough title investigation doesn't end with just the abstract. Given that abstracts may not be complete or may contain incorrect information, title investigators also rely on additional sources, including local tax records, previous owners' wills, and previous court rulings.
Curing or Resolving Problems
Title insurance also covers the expenses of resolving or "curing" any title problems, referred to as "defects," that arise during the search process. Common title defects include:
- Tax liens for unpaid property taxes
- Construction liens for unpaid bills for construction, renovation, or repair work
- Liends for other debts that used the property as security
- Court judgments, such as those given in divorce cases, which award part of the property to a former spouse
Although old liens or judgments don't typically obstruct a sale, in exceptional circumstances, significant problems with the title can come to light during the title search, making it challenging to proceed with the sale. For instance, the title search may reveal that the seller does not own the property, and therefore doesn't have the right to sell it, or that the previous transfer of ownership was fraudulent, and the true owner cannot be located.
If such issues arise, the lender may choose not to grant a mortgage for the property, leaving the buyer no choice but to back out.
Legal Costs & Loss Compensation
Title insurance policies provide protection against future costs linked to title disputes. For example, if you hold a title insurance policy, you won't have to pay legal fees when a building contractor who was not paid by the previous owner sues you.
In the unusual case that a court finds the recent transfer of the property to be invalid, the title insurance policy compensates you for any equity loss in the property. This could happen if it's uncovered that a previous owner transferred the property to another individual through a previously unknown will.
The coverage limit of a title insurance policy is usually equal to the assessed value of the property when the policy was issued, which is set by the lender's appraisal.
Types of Title Insurance
Title insurance is available in two distinct varieties: lender policies and buyer policies.
Typically, the buyer is responsible for paying the full cost of both policies, which is included as one of the many closing expenses. In a buyer's market, it may be possible to negotiate a cost-sharing agreement with the seller or even have the seller pay the entire amount.
Regardless, each policy functions differently.
Owner’s Title Policy
Also known as a buyer's title policy, this type of policy protects the buyer's ownership interest and future property ownership. This interest grows over time, meaning the financial responsibility for any title problems increases with time.
While a buyer's title policy is not required, it is still a wise investment, as the cost is only a small portion of total closing costs. The risk of financial loss is significant, so the cost is worth it.
The policy will remain in effect as long as the buyer owns the property, even after paying off the mortgage.
Lender’s Title Policy
These policies, also referred to as loan policies, protect the lender's interest in the property, which typically decreases over time. Because of this, they tend to cost less than buyer's policies.
The policy remains valid for the duration of the loan or until refinancing, at which point the lender secures a new policy.
How Much Does Home Title Insurance Cost?
The price of title insurance policies is rolled into one sum called a premium. Unlike other types of insurance, the premium for title insurance is a one-time payment made during the closing process, not a recurring fee.
There are various elements that can influence the cost of a title insurance premium, including:
- The value of the property - in general, more expensive properties have higher title insurance costs.
- The amount of effort required to keep information up-to-date on the property and surrounding properties.
- The effort needed for the title search and examination.
- The effort required to address any issues uncovered during the title search.
- The estimated cost of compensating the insured parties for any title defects.
On average, title insurance premiums cost about $1,000 for a one-time payment and cover all preliminary work and ongoing legal coverage. Nevertheless, the cost of a premium can vary widely and range from under 0.5% to more than 1% of the purchase price.
State regulations also have an impact on title insurance premiums. Some states have strict regulations, limiting the way title insurers structure their policies and how much they can charge.
In other areas, the regulations are less strict, giving title insurers more flexibility to set rates. For instance, in Wisconsin, title insurers can change their rates as they see fit, as long as they notify the state within a specific time frame.
Do You Need Title Insurance Coverage?
According to the law, acquiring a title insurance policy is not mandatory. Therefore, you technically don't "have to" obtain a title insurance policy.
However, failing to obtain title insurance can lead to significant financial losses. This is why lending institutions have title insurance. They have encountered too many instances of title-related problems leading to severe economic difficulties for property owners, and they don't want to be a part of it.
Without title insurance, you may be held accountable for past due liens, penalties, and other obligations linked to the property, even if the previous owner who was supposed to pay them has vanished. As the current owner on record, it becomes your responsibility to repay the creditor.
The inability to pay outstanding debts that arise could result in the loss of the property through foreclosure. This usually occurs in the case of overdue property taxes, which can be substantial. If you cannot pay the bill for past property taxes and cannot negotiate a payment plan, the local government may confiscate and sell your property in a tax-foreclosure auction.
How to Choose the Right Home Title Insurance Policy
Throughout the underwriting procedure, you will receive a suggestion for title insurance. This proposal might originate from different sources, including your mortgage lender, title agent, real estate agent, or real estate lawyer, based on the real estate transaction norms in your state.
Title insurance policies and their expenses do not vary considerably among insurers who operate in the same jurisdiction. And purchasing title insurance is one of many steps involved in obtaining a mortgage loan, which may tempt you to accept the suggestion without further consideration.
However, you are not obligated to do so. The Real Estate Settlement Procedures Act, a federal law, prohibits anyone from forcing you to use a specific title insurance company. As a home buyer, you have the liberty to shop around and choose the best title insurance provider that caters to your needs. On the other hand, you cannot compare lender policies.
Since title insurance is highly standardized, the most significant aspect to consider when searching for an owner's policy is the cost. The initial closing estimate from your lender should include an estimate of the total cost of your owner's policy. This estimate should be your benchmark for finding a cheaper policy.
To search for a more economical policy, utilize the internet to look for "owner's title insurance policy in [your state]." Browse each provider's website and search for pricing information. In some cases, you may find the actual prices listed on the site, but if not, a brief phone call should provide you with a rough estimate.
If you're buying both lender's insurance and owner's insurance from the same company, inquire about a bundle discount. They may not offer one unless you ask. Also, if the seller acquired the property within the past 10 years, request the title company for a reissue rate, which essentially extends the seller's current policy.
After comparing several quotes, select the most budget-friendly option. Ensure that the policy you select covers a full title search, rectification of defects, and future legal expenses.
Final Word
Title insurance doesn’t come with a cheap price. Based on variables like the property's location, its value, and its history of ownership, the cost of an owner's title insurance policy can range from less than half a percent to over one percent of the purchase price.
When you factor in the lender's title policy, which is typically less expensive but still carries a cost, you're facing a significant increase in your closing costs.
However, this doesn't make title insurance a poor investment. When compared to the total cost of homeownership, the cost of title insurance is negligible and the protection it offers is immeasurable. While title issues are uncommon, title insurance protects you from financial responsibility for any past debts or legal fees related to those issues.
In the worst-case scenario, title insurance could mean the difference between keeping your home and losing it to foreclosure.
Considering this, title insurance for your home appears to be a smart investment.
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