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Buying or refinancing a home is one of the most significant transactions you’ll ever make. That’s why it is essential to make sure the process goes smoothly every step of the way.
One of the most important steps in that process is obtaining title insurance so there are no bad surprises that could put your transaction at risk.
You and your lender will want to ensure that the property title is clear and free from various issues that could derail the time, energy, and effort you put into buying the home.
You’ll work with a title company that will perform this important task. Title companies also handle property closings and hold money in an escrow account until the purchase is complete.
As part of the title insurance process, a title company will search for:
- Errors in public records
- Unknown liens for taxes and unpaid contractors
- Missing heirs and undiscovered wills
- Forgeries and false impersonation
- Undiscovered encumbrances and easements
- Unknown easements
- Boundary disputes
- Other red flags
A title company will search for defects by researching several types of public records, including deeds, mortgages, wills, divorce decrees, court judgments, and all other records that could pose a challenge to a clear title.
When refinancing an existing mortgage, the title company checks for liens or encumbrances that may have occurred since the original purchase. That may include a home equity loan, lien for unpaid taxes, divorce settlement, or other similar scenarios.
The title search determines who owns the property, what outstanding debts are against it, and the condition of the title. As a buyer, you’ll receive a title report describing the findings in detail. A title insurance policy will also protect the lender and the new owner from possible losses if someone else claims ownership after the sale.
Two Types of Title Insurance
There are two types of title insurance.
A home lender’s policy protects the lender in a title dispute and lasts for the duration of the mortgage. Lenders will require their own title insurance as a condition of your loan. However, a lender’s policy does not protect a home buyer.
A homeowner’s policy protects the homeowner during title disputes. It is issued on the home’s full purchase price and covers legal fees for defending the claim to the title. This policy lasts as long as the homeowner or their heirs own the property.
A homeowner’s title insurance policy covers issues that may arise after the purchase, including:
- Zoning/building permit violations
- Fraudulent liens filed against the property
- Neighbors building on your property or taking it for their own use
- Other situations that are not discoverable in a title search
Buying Title Insurance
It is typically less expensive to purchase lender’s and owner’s policies simultaneously from the same title insurer. Also, the home buyer should insure the property’s full purchase price, while a lender only requires enough title insurance to cover the home loan amount.
In most cases, the real estate agent selects the title company for a home purchase or the lender when refinancing. However, under the federal Real Estate Settlement Procedures Act (RESPA), borrowers have the right to choose their own title company.
It is unlawful for a lender to mandate that you use a particular insurer.
Some title insurance rates are set by individual states, so there’s no price variation from company to company. Other states do not regulate title insurance fees.
Depending upon where you live, the premium for a title insurance policy is paid by the buyer or the seller or split between both parties. Many times, it can be negotiated as part of the home sale process. Also, premiums are paid only once.
There are no ongoing premium payments, unlike most other forms of insurance.
Premium costs are based on the dollar amount of coverage. So there are no surprises, all title insurance companies must file a schedule of rates and forms with the insurance commissioner for their state.
Costs can vary widely from state to state because of differences in what title insurance covers. In many states, the title insurance company also handles the closing.
In others, an attorney or escrow company may handle the closing.
Protection is effective concurrent with the policy’s issue date and covers issues arising prior to your ownership.
Title insurance companies may offer discounts when bundling title insurance and escrow, or for first-time buyers when a property has been resold in the last five years, a subdivision bulk rate for homes purchased in a new development, and other similar scenarios.
» MORE: See today’s refinance rates
The Difference Between Title Insurance and Homeowner’s Insurance
Title insurance protects against losses due to title defects. Homeowner’s insurance insures your house and contents and usually covers losses due to fire, theft, vandalism, and personal liability claims brought against the homeowner/policyholder.
Homeowners’ premiums are billed monthly, quarterly, or annually.
Lender’s title insurance only protects against undiscovered claims made before the sale. Policies don’t cover claims that may occur after you purchase the property.
For example, you won’t be covered if a subcontractor files a claim or a lien against your newly built home after the purchase date.
To guard against events like these, you can purchase expanded coverage, known as an owner’s title insurance policy, as described above.