Are you ready to buy your next home, first home, or investment property? Do you wonder why you have to pay money for title insurance and what, exactly, it does to protect your investment? Title insurance protects both buyers and lenders from financial losses that could occur related to the title of the property being bought and sold. Here is more information on what title insurance is and why it’s important in your real estate transaction.
What is Title Insurance?
Before we learn more about how title insurance works and what’s covered by it, let’s first delve into what it actually is. Title insurance protects both buyers and mortgage lenders from any loss that would result from a defect in the title (the legal rights of ownership of a property). When either a commercial or residential property is sold, the title must be transferred from the previous owner to the new one. If there is nothing wrong with the title, this is a simple process. However, if the title has issues such as claims of ownership, liens, or mistakes in public records, it could result in financial losses if the problems aren’t discovered until after the sale is complete.
Unlike other forms of insurance, title insurance is typically a one-time premium paid at closing and provides long-term protection. The cost of the premium can vary depending on the property’s value, but it is often a small price to pay for the peace of mind that comes with knowing your investment is protected.
How Title Insurance Works
Title insurance guarantees that the title to the property is free of any legal issues. To ensure this, the title company performs a title search to identify any potential problems. The search looks for unpaid taxes, disputes regarding ownership, other claims on the property, and outstanding liens. If issues such as this are discovered, the title company alerts the necessary people so they can be resolved before the transaction moves forward.
Once the title search is complete, title insurance is issued. It can be purchased in two forms:
- Lender’s Title Insurance: This policy protects the lender or mortgage company. It ensures that their financial interest in the property is secure. Lender’s title insurance does not protect the buyer, but it’s typically required by the lender during the closing process.
- Owner’s Title Insurance: This policy protects the buyer of the property. If a defect in the title is discovered after the purchase, the insurance covers legal fees and any financial loss that may occur as a result. It also covers issues that might not have been discovered during the title search, offering long-term protection.
Common Issues Covered by Title Insurance
Title insurance can protect you from several potential issues related to a property’s title, including:
- Outstanding Liens: If the previous owner didn’t pay their mortgage, taxes, or contractors, these unpaid debts could result in a lien against the property. Title insurance can help resolve these claims.
- Ownership Disputes: Title insurance can protect against claims by individuals who assert they have legal ownership of the property, such as heirs of a previous owner or someone who claims the seller didn’t have the right to sell.
- Clerical Errors: Mistakes in public records, such as incorrect legal descriptions of the property or misfiled documents, can cause confusion about ownership. Title insurance helps protect against such issues that may arise.
- Fraudulent Activity: If the seller fraudulently transfers the property, such as by forging signatures or using false identification, title insurance will protect the buyer from loss.
- Undiscovered Wills or Heirs: Sometimes, a previous owner’s will might surface after the property is sold, or an heir might come forward claiming rights to the property.
Cost of Title Insurance
Title insurance cost is based on the value of the property as well as the insurance company you choose and the state in which you are buying the property., In general, it’s a one-time premium that is paid at closing and it covers the property for as long as the buyer owns it. In some cases, the seller may cover the cost of the buyer’s owner’s policy, but typically, the buyer pays for this coverage.
Title insurance is an important part of your real estate transaction. If you have questions about title insurance or are looking for the right title insurance company for your next real estate purchase, please reach out to our team at Trustworthy Title. We’d love to help.