As a homebuyer, you’re probably excited to finally be closing on your home purchase. However, for many homebuyers, closing on a home purchase comes with a lot of uncertainty. When you begin the process of closing on a home purchase, you may suddenly find yourself faced with a lot of different costs. One of these costs includes the title insurance. To help you better understand what title insurance is, here are a few answers to some frequently asked questions.
What is title insurance?
Title insurance is a type of insurance that protects either the home purchaser’s interest or the mortgagee’s interest in a property, depending on the type of title insurance policy you purchase: The Owner’s Policy protects the home purchaser (i.e. home owner), while the Lender’s Policy protects the mortgagee (i.e. mortgage lender)
To the extent of the policy’s coverage, title insurance protects the insured from incurring financial loss or legal obligations due to title defects, hidden liens, or other title issues that are specified within the policy. Simply put, title insurance protects your interest in a property, so you can rest assured that the home you purchase is your in fact you own, and that you will not be held responsible for issues with your title that you did not cause.
What is the difference between an Owner’s Policy and a Lender’s Policy? Owner’s policy is usually purchased by the home seller on behalf of the home buyer, while a lender’s policy is purchased by the homebuyer (i.e. mortgage borrower) on behalf of the mortgagee (i.e. mortgage lender) before the home loan is issued. Both types of title insurance policies insures a clean and clear title, protecting the insured from the financial and legal burdens of unforeseen title issues. However, a Lender’s Policy usually only covers the amount of the loan, and the coverage gradually decreases as the loan gets paid off.
What can I expect to have covered in my policy? For homeowners, getting an owner’s policy protects you from a number of things (e.g. mistakes or errors that have been made in public records or during the title search). If an issue comes up that was not discovered during the title search, you are protected under this insurance. Also, if you are ever in a situation where you need to defend your title, your insurance covers the costs of negotiation with third parties and the payment of legal fees as well.
What is not covered under my policy? This depends. As with any insurance, there are some risks that may not be covered under your policy. For example, this type of insurance does not protect you against anything found during an inspection of your property. Also, it does not insure against any title issues that you are already aware of.
Why do I need title insurance? Home owners want to have title insurance because it affords certain privileges such as the ability to use and enjoy your home without limitations that were not bargained for, or the freedom from incurring any financial obligations due to hidden title issues, etc.
For example, say that one of the previous owners of the home you are about to purchase failed to pay his state taxes, and as a result, a tax lien was place on the property 50 years ago. Upon reviewing public records today, the abstractor makes an error and fails to notice that there is a lien on the property. Title insurance will protect you from being obligated to pay for this tax lien.
Where should I shop for title insurance? To purchase title insurance, you need to find a licensed insurance carrier. The law prohibits anyone without a license to issue this type of insurance. To protect lenders and homeowners, states typically regulate these carriers heavily so that you can be confident that you remain protected after you purchase a title insurance policy from a licensed insurance carrier.
As we mentioned earlier, closing on a home purchase will require a number of necessary costs that may come as a surprise to you. Talk to your loan officer, real estate agent, and any trusted professional during the buying process to get answers to your questions regarding the closing costs for your home loan and home purchase.