Once you’ve decided to buy a home and are in escrow, you need to know about title insurance. Since title refers to evidence of who the lawful owner of a property is, title insurance is indemnity insurance for property owners and mortgage lenders against loss resulting from defects in the title.
Title Insurance Ins and Outs
The most common types of title defects involve unpaid property taxes, the improper sale of the property (such as without a part-owner’s consent), or an undisclosed lien or easement. For example, if a previous owner failed to pay property taxes for several years, the taxing authority could put a lien on the property and sell the property to recoup the unpaid taxes. The purpose of title insurance is to protect the lender or owner from any loss resulting from such a situation.
There are two types of title insurance. The most common type is lender’s title insurance, which is paid for by the borrower but protects only the mortgage lender’s interest. Lender’s title insurance is commonly required for every mortgage and lasts for the duration of the mortgage.
The second type of title insurance is owner’s title insurance, which is a separate policy that can only be taken out at the time of purchase. It is frequently paid for by the seller to protect the interest of the buyer, i.e., the new owner, and lasts for as long as the buyer owns the property.
In many states, rates charged by title insurance companies are regulated, but fees for additional expenses like courier and wire transfer costs can vary. This results in differences in the rates charged. Therefore, you can shop around for the lowest fee. However, you should also consider a company’s reputation, since it will have to perform a records search to verify the chain of title, and the thoroughness of that search can determine whether you face a claim in the future. You might also consider using a different title search company than the one the seller used when he or she purchased the property, just to increase the chance of discovering any information that might have been missed during the original records search.
Title insurance may not seem like a big deal when you’re in the process of buying a home. But if a claim should arise in the future, you’ll be glad you have it.