What is title insurance? How does it work?
We’re all familiar with various types of insurance; health, auto and life insurance come quickly to mind. While you'll typically have these kinds of insurance policies for a long time (perhaps even your whole life), you'll likely only have to think about title insurance for a few days and only a few times in your lifetime. Yet owner's title insurance can be incredibly important for your financial wellbeing.
What is title insurance?
Title insurance is an essential part of the homebuying process. It insures the new buyer has clear, clean and merchantable title to the property just purchased. Though it appears near the end of the undertaking, when your stress level is likely highest as you wonder about future mortgage payments and other expenses, title insurance can protect the buyer from unwelcome surprises down the line. For that reason alone, investment in this little-understood insurance is well worth the cost.
Why did title insurance begin?
Back in 19th-century America, buyers were required to prove the title they were procuring was valid. Given the lack of recordkeeping in those days, along with the possibility of accurate records being misplaced or lost in a fire, it was a nearly impossible process to navigate. Plus, it took a lengthy amount of time, given that the transportation of the day involved horses rather than cars.
In 1868, a dispute over ownership of a home was resolved by the Pennsylvania Supreme Court. It prompted some legislators to consider protecting those purchasing real estate. In 1876, after a law two years earlier allowed title insurance in Pennsylvania, the first company offering the protection was incorporated.
Why is a title search crucial to a mortgage?
Understanding the title process is important for every homebuyer. Through an examination of public records and other material that can go back 50 years or more, a title search will uncover any problems associated with the property, such as liens, past-due property taxes, court judgments and claims. There may even be disputes over a will crafted by a past owner.
Unearthing these issues before the transfer of the property takes place protects not only the buyer, as previously mentioned, but the lender, whose loan could be endangered by past claims that come to light after the transaction. The risk is avoided by having title insurance numerous.
Title insurance is an essential part of the closing costs on a home, which to the buyer’s chagrin, can easily run thousands of dollars.
Lender’s title insurance vs. owner’s title insurance
Lender’s title insurance protects the lender from title defects such as fraudulent acts or prior liens that could prevent the mortgage from being valid and enforceable against the property. It also insures the lender is in a first-lien position in the event of a default or foreclosure. It helps ensure the mortgage will not be hampered by unknown encumbrances. But if some problems are uncovered during the lender’s title search, it could hinder the present owner’s ability to sell or the buyer’s ability to borrow.
Owner’s title insurance protects the new buyer. After such a large investment, no one wants to discover after the transaction there are old or unpaid liens from the previous owner on the property, which would prevent the new buyer from selling the property cleanly down the line. If title defects are missed during the title search, title insurance provides financial protection for expenses related to the issue. Always check with your real estate agent about the best companies to procure title insurance from in your area. If you prefer to find one on your own, conduct a Google search to find a company that’s close by.
You'll want title insurance for these house title troubles
The number of issues that can impact a title is broad. While many homebuyers look at title insurance costs as another line item that increases expenses when closing, title insurance helps protect you against problems like:
- Unexpected liens
- Delinquent property taxes
- Illegal deeds
- Inheritance issues
A lien is a legal claim to assets, and liens pop up frequently during title searches. If improvements have been made to the house, contractors file liens – financial claims – to ensure they’ll be paid. Some liens are not filed properly; others never are properly marked that the payment has been made. Liens can take weeks to resolve, especially if, in the example of contractors, they are no longer in business or have left the state.
A deep dive into the history of the property could uncover delinquent taxes – i.e., real estate taxes that were never paid and are still owed to the government. In fact, it could be the person selling the house. Since annual property taxes can be 1 percent-2 percent of the purchase price, depending on the state, it’s well worth finding out whether they’re paid up.
A deed is a document that will list the buyer and seller. Those with a deed have title to the property. In the past, deeds may have been held by those who had no right to possess one, such as a minor. Any problems with past deeds may affect present ownership.
There could be conflicting claims to the property due to a past inheritance. A title search will uncover if they have any impact on the transfer of the property.
How are issues with a house title resolved?
It is up to the seller to fix any problems. For example, if the issue is delinquent taxes, the seller must pay them for the transaction to proceed. Even if the issue is extremely minor, it must be addressed, or the sale can not go through.
Title insurance cost
Title insurance can cost between a few hundred dollars to a few thousand dollars. How do you know your title insurance costs when buying a home? They'll depend on which state you live in. Some states have fixed premiums; that means you'll have roughly the same title insurance cost no matter who you buy from. Other states let the title insurance providers set the premium cost, so you can shop around for the best price.
Does every state offer title insurance?
Forty-nine states offer title insurance. Which one is the outlier? Iowa. Back in 1947, the state outlawed private title insurance after a number of insurers went belly up after a severe real estate downturn. The state of Iowa now acts as a type of title insurer known as the Iowa Title Guaranty.
Every homebuyer should opt to purchase title insurance and find out everything they need to know before buying title insurance. Why? Unless you ask a title company to perform a title search, you will have no idea what troubles from the property’s past can come back to haunt you. Given the size of your investment in a new property, the last thing that you need is an unexpected large expense.