Obtaining title insurance is a very standard part of the home buying process, however, most people don’t fully understand how important it is. Title insurance protects both the homebuyer and the lender from any issue that could possibly prevent them from securing free and clear ownership of the property.
Anything from easements to deed restrictions, liens on the property, or another party still possessing a right to the house, can come into play. While it’s very likely that title insurance will never be called upon, the cost of not having it and potentially losing the house itself is just too much of a risk.
The process of getting you title insurance is initiated by your escrow or closing agent after a purchase agreement has been signed. Your title insurer will be one of the major U.S. title insurance underwriters. For example, if you work with Settlements, Ltd., you’d be insured by First American Title Insurance Company.
If you don’t get title insurance, a number of things could potentially go wrong. From extreme misrepresentation of property ownership (a renter or another party posing as sellers) to common issues found during a title search like liens filed against the house, a forgotten name on the deed that now must be present at the closing to sign, or a previous seller’s ex-spouse never signing off at closing as required. Having title insurance in situations like this is invaluable to both buyers and lenders.
Typically, title insurance is comprised of two policies: a lender’s policy and a owner’s policy. You may sometimes see or hear these referred to as a mortgagee’s policy and a borrower’s policy.
If you’re taking out a mortgage loan, your lender will generally require you to buy a lender’s policy. This policy protects their interest in the property. It covers the lender’s legal costs and reimbursements if you’re unable to make mortgage payments because you’ve lost the house to someone else’s claim.
Unfortunately, although the buyer is purchasing this policy, it works solely for the lender and doesn’t protect the homeowner. This is why the buyer will be given an opportunity to purchase borrower’s or owner’s title insurance to benefit them and their heirs.
Available at a one-time premium, an owner’s policy gives the buyer protection against any potential title defect that could cost them their ownership rights. Owner’s coverage protects against:
Enhanced owner’s policies are also available to cover title search and zoning violations. Additionally, buyer’s title insurance also offers protection during a refinance or when it’s time to sell the property. In the event a defect is found, the title insurance company will push the refinance or sale through; typically by offering insurance against the defect to the new lender or buyer.
Before issuing any policy, the first task at hand is to ensure the title is clear. This is accomplished through a title search where public records pertaining to the property are carefully combed through for discrepancies and inconsistencies. Everything from court to bankruptcy filings, tax records, past deeds, wills and trusts, and divorce decrees can be tracked down in a public records search.
Prior to closing, a title insurance commitment, or preliminary title report, gives everyone a chance to review the findings. This is generally the last chance there is to call off the sale. Since title defects are the seller’s problem, the closing agent will generally call the seller’s real estate agent to report the holdup and make steps to ensure the title is cleared in time for closing.