If you’ve never purchased a home before, you may be unfamiliar with title insurance. When it’s time to buy, you may be asking yourself, what is title insurance, and do I even need it?
Title insurance is a form of protection that mitigates loss due to errors on the property’s legal title. Let’s review what is title insurance, what it offers, how much it costs, who pays, and more.
What is Title Insurance?
Title insurance is an insurance policy that can be taken out on a property’s title that is going to be purchased through a real estate transaction. Title insurance protects the new homeowner as well as the lender from suffering a loss in case there is an error on the property title’s ownership record.
There are two types of title insurance — lender title insurance and owner title insurance. As the names describe, one protects the financial interests of the lending institution that funded the home purchase, and the other safeguards the individual homeowner.
A property title is a collection of documents that determines who the legal owner of a real estate property is. A few of the key documents that compose the property title are the official deed of ownership, ownership history records, and outstanding debt paperwork.
How Does Title Insurance Relate to a Home Purchase?
Now that you know the answer to what is title insurance, you’re probably wondering how this relates to the real estate purchase.
Property titles come into play during a real estate transaction as an official title company must verify that the seller of the home is the legitimate legal owner of the property.
Title companies perform a title search, where they search for any red flags or potential issues that may disrupt the real estate transaction.
It’s not uncommon for there to be defects on the property title. By working alongside the title company during the escrow period, home buyers are generally able to clear simple title issues such as unpaid property taxes, liens, and filing errors.
But, not all title issues are as easily dealt with.
If there is a substantial issue with the seller’s legal ownership status of the property, they may be unable to transfer the title to the buyer upon completion of the transaction.
In these cases, you would be paying for a home that you would not actually legally own — because the seller was not the authoritative owner of the property, to begin with.
An example of a red flag on a property title would be if any other individual had a claim to ownership of the home, perhaps through inheritance. Even if that person was not aware of their claim to ownership, which is often the case, a clean title is required to complete a real estate sale.
What Does Title Insurance Protect Against?
The title search is an essential step in the escrow process, but it is possible that details fall through the cracks.
Even when an official title check is performed, it’s possible that some details can be missed. Title insurance protects your home’s official ownership record against these missed details, if any.
When you have title insurance, you’ll be protected in the event that someone comes forward with a claim to ownership of the property that was not addressed during the title check.
If this happens, legal action would need to be taken. When you have title insurance, the policy will cover the costs. However, without title insurance, you would be responsible for paying out-of-pocket.
Is Title Insurance Required When Buying a Home?
If you are purchasing a home with a mortgage loan, you will almost always be required to pay for the lender title insurance policy as a part of your loan underwriting expenses. Most mortgage lenders require a title insurance policy on all loans.
However, title insurance policies for homeowners are not required. Owner title insurance is an optional add-on. When buying a home, should you opt for this policy?
The safest and most secure answer is yes. While title insurance does incur another cost on your real estate purchase, it’s essential for securing your ownership of the home. The last thing that you want after purchasing a new home is to find out that there are title issues that are disputing your ownership.
The cost of an owner title insurance policy is a percentage of the property’s final purchasing price.
Depending on which real estate market you’re transacting in and the state of the market at the time of your purchase, it’s possible to negotiate the payment responsibilities of the owner’s title insurance with the seller.
If you’re interested in seeing whether this is something you may be able to leverage in your transaction, speak to your agent. Top agents will know what is customary in your market, and how to navigate negotiations to represent your best interests.
To learn more about the ins and outs of buying a home, explore more articles from RealEstateAgents.com.