Home Title Insurance: What Is It And Do You Need It?
If you’re planning to buy a home, one issue you may have to address prior to closing is the purchase of a title insurance policy. Title insurance is a special type of indemnity policy that is intended to protect against losses that may occur prior to the closing date. This type of policy differs significantly from homeowner’s insurance or private mortgage insurance (PMI) policies which are designed to protect against future losses or damages. While buyers are typically not required to secure a title insurance policy for themselves, it may be to your advantage to do so when purchasing a home. Read on to find out if you need home title insurance.
How Title Insurance Works
When you purchase an existing home or a piece of land, the closing attorneys will conduct a title search in order to determine whether there are any existing liens on the property or if there are any restrictions as to the property’s use. This involves reviewing public records including tax records, court records and deed records. The purpose in doing so is to identify any potential problems that could affect your ownership of the property either prior to or following the completion of the sale.
When you purchase title insurance, the title search is typically done by the title company issuing the policy. The title company is responsible for addressing and correcting any issues that may arise during the course of the title search. At closing, the homebuyer is charged a one-time premium for the title company’s services. According to the American Land Title Association (ALTA), the cost is typically one percent of the purchase price, although title insurance rates may vary from state to state. Your title insurance coverage remains in effect as long as you and/or your heirs retain an interest in the property.
Types Of Title Insurance Policies
There are two basic types of title insurance policies: a lender’s policy and an owner’s policy. Generally, if you take out a mortgage loan to purchase a property, the lender will require you to purchase a lender’s title insurance policy. This type of policy covers the lender up to the amount of the mortgage loan in the event that unknown defects or issues relating to the property arise after the financing has been completed. This type of policy remains in effect until the mortgage loan is repaid but can be terminated if you sell the property or refinance your original loan.
An owner’s title insurance policy is optional and in many cases, the seller will pay for the policy as part of the title transfer process. This type of policy protects the owner’s interest in the home should issues arise stemming from unknown defects associated with the property’s title. Depending on where you live, your title insurance may cover the full value of your home, including your equity or it may be limited to the amount of your mortgage loan.
What Title Insurance Covers
Both owner’s and lender’s title insurance policies are designed to protect the policy owner from legal claims arising from a title dispute. These policies will cover any legal costs incurred if you or the lender is sued in connection with a title issue. Generally, a title insurance policy should cover you in the event of issues arising from any of the following:
- Claims made on the property by a previously unknown heir of the seller or landowner
- Unrecorded liens
- Unrecorded easements or access regulations
- Forgery of deed documents or impersonation of the seller
- Incorrect recording of deeds, including omissions or undisclosed errors
- Incorrect information in examining records
Many title companies also offer an extended owner’s policy which covers an additional set of circumstances including building permit violations, incorrect surveys, zoning law violations, covenant violations, living trusts, structural damage due to mineral extraction operations and encroachments or forgeries that took place after the title insurance policy was issued. In the event that a claim is brought against you or the mortgage lender and the court rules in favor of the claimant, the title insurance policy will cover any financial losses including
your down payment, principal payments, cost of improvements and the remaining balance on the mortgage.
Conducting Your Own Title Search
If you don’t want to invest in a title insurance policy for yourself, you can take steps to conduct an independent title search on your own. You can begin by going to the local county clerk’s office to check for any liens or judgments recorded against the property. The Secretary of State’s office can provide you with information regarding the filing of financing statements under the Uniform Commercial Code or state regulations.
You can also check with the U.S. District Court nearest to where you live to determine whether the property has been included in any bankruptcy proceedings currently pending involving the seller. Finally, you can contact the local building or fire department to determine whether there are any structural violations recorded in connection with the property and whether a valid certificate of occupancy has been issued. While performing your own search may be less expensive than purchasing a title insurance policy, the amount of time involved may outweigh any potential savings. You are also unprotected in the event that a legal claim arises.
Securing a title insurance policy can prevent future financial headaches if it’s determined that there is a problem with your home’s title. If you’re concerned about safeguarding your financial investment, a title insurance policy offers the protection and peace of mind you need.