Title insurance is a type of insurance that protects mortgage lenders and homebuyers from financial loss due to an ownership claim on a property. It indemnifies the policyholder from any title discrepancies that may arise during or after the purchase of a property. In other words, title insurance protects a homebuyer or lender in case someone disputes the legal ownership of the home. Title insurance policies protect against financial losses because of liens, will disputes, claims of fraud, or clerical problems in courthouse documents.
The Importance of Having “Clear Title”
When a person is in the process of buying a house, the title company or settlement company will perform a search on public property records to make sure that the property title is clear of any legal issues. The company will determine who legally owns the property and whether there are any claims on it. Common claims include back taxes, liens, building code violations, easements, or other encumbrances. In order for the property owner to sell to a buyer, the property owner must have clear title. They have complete ownership of the property without any legal claims on it.
How Title Insurance Works
If a homeowner discovers a lien or an ownership claim on the property they purchased, the title insurance policy can cover the costs of paying off the lien or defending the lawsuit. Title insurance can provide a cash settlement to a new owner whose property has a fraudulent or forged deed. The insurance can also protect the homebuyer if an issue develops when they are trying to re-sell the property. More specifically, title insurance protects against common issues such as:
- Back taxes
- Claims by an ex-spouse/co-owner
- Filing errors
- Flawed property records
- Incorrect signatures on legal property documents
- Property survey errors and boundary disputes
- Restrictive covenants
- Outstanding lawsuits
- Undocumented easements
- Unknown heirs with an ownership claim
While title insurance can protect the homeowner against many claims, it does not protect against newly-created property infringements. Title insurance won’t protect the homeowner against title problems that they caused themselves (ex: failure to pay property taxes). It also doesn’t protect against eminent domain.
Types of Title Insurance
The two most common types of title insurance is lender’s title insurance and owner’s title insurance. The borrower purchases lender’s title insurance to protect the lender against loss — in case the seller is not legally able to transfer the title of ownership rights. A lender’s title policy protects the financial organization providing the mortgage from any claims that would put their stake in the home at risk.
The seller typically pays for owner’s title insurance to protect the buyer’s equity in the property and against any defects in the title. It’s designed to protect the homeowner in case any claims arise concerning the ownership of the property.
Purchasing Title Insurance
While owner’s title insurance is not required in a home purchase, lenders almost always require borrowers to purchase insurance on the lender’s behalf. It’s usually considered part of the closing costs. At closing, the escrow or closing agent will begin the process of obtaining title insurance for the parties. Depending on the state where you live, the purchase price of the home, and the insurance provider you select, the title insurance policy can cost anywhere between $500 and $3,500. It’s a one-time fee.
Have Questions? Contact Brian M. Douglas & Associates
Title insurance protects the lender and purchaser against significant financial and legal risks. Real estate investors should make sure that the property title is clear and that there is a title insurance policy in place before proceeding with any purchase. If you have any questions about property titling or title insurance, please reach out to us. Our team of experienced real estate attorneys would be happy to help. To schedule a consultation, you can reach us at (770) 933-9009 or via our online contact page.