Title insurance coverage may be very confusing! You really want to understand it since it is required whenever you get a mortgage. Your lender wants to make sure that the amount you owe them is protected – but what about your down payment and your interest in the property?
What is Title Insurance?
Title insurance is a policy that covers third-party claims on a property that don’t show up in the initial title search and arise after a real estate closing. A third party is someone other than the property’s owner, such as a construction company that didn’t get paid for its work on the home under a previous owner. The term “title” refers to someone’s legal ownership of the property.
TItle Search Before Closing
How do you know that there are no liens on the property or other title issues? How does title insurance coverage work?
Before your home loan closes, the title company will perform a title search. The title company searches for public records related to your home to try to find any title defects that could affect the lender’s or buyer’s property rights such as:
- Liens can get placed on the property by a contractor, tax authority or lender who hasn’t been paid. You don’t want to get stuck paying a previous owner’s unpaid bills.
- Easements are someone else’s right to use your property even though you are the owner. For example, if there are utility lines in your backyard, the utility company will have an easement that allows them to access your property if they need to work on the lines. The easement could limit your ability to use your property however you want.
- Encumbrances include liens (also called “financial encumbrances”) as well as easements, but also include zoning laws, restrictive covenants imposed by homeowners associations and leaseholder rights.
A title company searches public records including deeds, mortgages, divorce decrees, court judgments, tax records and child support orders.
If the title search reveals any problems (also called “clouds”), the title company will try to resolve them. In some cases, your real estate agent will need to work with the seller’s agent to get the seller to resolve the problem. In other cases, the problem may be significant enough to delay or even derail the sale.
Title Insurance Coverage Laid Out
A title insurance policy covers underlying issues with a property’s title that might have been missed before you bought the home. Basically, it comes in handy if the public record search conducted by the titled company failed to catch any liens or ownership disputes.
These are some of the issues that you will want title insurance coverage for:
- Property survey errors
- Boundary disputes
- Errors on the property deed
- Building code violations by a previous owner
- Conflicting wills
- Claims by an ex-spouse who didn’t sign off on the sale
- Forged documents
- Liens from contractors, taxing entities or previous lenders
- Encroachments
- Improperly recorded documents
What is Excluded from Title Insurance Coverage
Title insurance covers issues that could have impacted your decision to buy the property. It doesn’t protect you against all possible infringements on their property rights. For example, it doesn’t protect you against title problems caused by your own actions, such as failing to pay the company that replaced your roof or failing to pay your property taxes. It also doesn’t protect against eminent domain, which is when a government seizes private property for an ostensibly public purpose.
In short, it doesn’t protect against issues newly created after you buy the property. It protects against issues that might have affected your decision to purchase the property had you known about them at the time.
How Does Title Insurance Work?
An owner’s title insurance policy can cover the costs of paying off a previously undiscovered lien or defending against a lawsuit filed against you by someone claiming a right to the property. It can also provide a cash settlement to a new owner who unwittingly purchases a property with a forged deed from a fraudulent seller who did not actually own the home. Furthermore, owner’s title insurance protects your ability to sell the home one day if a problem turns up during a later title search.
You’re probably less concerned about how a lender’s policy works since it doesn’t protect you. But you might still be curious as you’re paying for it.
Let’s say you lose your home because it turns out the property was fraudulently sold to you. You’re not going to keep paying the mortgage. The lender will then file a claim with its title insurance company to recoup the mortgage payments it was expecting to get from you.
Under other circumstances where you stopped paying your mortgage, the lender could foreclose and recoup its losses from selling the home. But if it turns out that someone else has a right to the home, foreclosure isn’t an option.
Types of Title Insurance
There are two types of title insurance: lender’s title insurance (also called a loan policy) and owner’s title insurance.
- Lender’s title insurance: This type of title insurance policy protects the financial interests of the company that issues the mortgage (just like mortgage insurance does). It makes sure the lender has the top claim on the property above any other liens. You’ll have to purchase lender’s title insurance any time you take out a mortgage, whether you’re buying a home or refinancing.
- Owner’s title insurance: This policy protects you—the homebuyer. For an owner’s title insurance policy, the coverage amount is usually equal to the purchase price and remains constant for as long as you or your heirs own the home. Owner’s title insurance is optional and only needs to be purchased once. If you are lucky enough to be paying cash for your property, you still should consider getting the owner’s title insurance because it is less expensive than litigating against unexpected claims.
- Enhanced Coverage: The standard coverage only protects the value of the property at the time you purchased the property. Enhanced coverage protects the value of the property as it increases.
Major mortgage investors Fannie Mae and Freddie Mac, who frequently buy home loans from lenders after closing, require the lender’s title policy coverage to be at least as much as the mortgage principal. As you pay down your mortgage principal, the lender’s coverage declines accordingly.
Who Pays for Title Insurance
This is one of those questions with the legalese answer – it depends (on the location of the property.) Here in the mid-Atlantic, the buyer pays for the lender’s title policy and the owner’s (if they choose to buy it.)
How Long Does Title Insurance Last?
A lender’s title insurance policy stays in place until the loan is paid off. An owner’s title insurance policy, however, lasts for as long as you own the property.
Should I Get Title Insurance If I am Paying Cash
Yes! Owner’s title insurance helps new homeowners avoid unexpected expenses such as balances owed on previous mortgages, unpaid taxes and contractors’ liens discovered after closing. Additionally, owner’s title insurance protects against potential easement issues.
How Much Does Title Insurance Cost?
Title insurance policy costs often range between $500 and $3,500 for each policy and may vary by provider or be regulated by the state insurance commission. The cost also generally varies based on property location, purchase price and the extent of the coverage. For example, you may opt to have a restriction endorsement to protect against any HOA or subdivision violations related to the home’s structure.
Your title insurance premium is a one-time charge that’s paid at closing.
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