Understanding Title Insurance in Real Estate
Would you like to know what title insurance is and how it works? You’re probably interested in learning the cost of title insurance and whether it is worth having.
Homebuyers often ask real estate agents or mortgage lenders about title insurance and why they always need it.
By the time you’re done reading, you’ll have a comprehensive understanding of this insurance and why it makes so much sense to have it.
You will also learn precisely how title insurance works.
What is Title Insurance?
Quite simply, title insurance is a type of policy that protects a lender’s interest and a homebuyer’s interest in the property against title claims.
So when people ask who title insurance protects, a title insurer can protect lenders and homeowners.
With defects in property titles, insurance can protect lenders and buyers from financial loss.
There are two types of title insurance: a lender’s and an owner’s policy. As you might expect, a lender’s policy protects the lender, and an owner’s policy covers the owner.
There are title companies that sell this insurance. First American Title Insurance Company and Chicago Title Insurance Company are two of the largest insurers.
What to Know About Title Insurance
To pass papers, it is essential to have a clear title. Before title insurance can be issued, title companies must do an extensive search to ensure no encumbrances or claims against the property, such as liens.
A title search will examine public records to determine the legal owner of a property and if there are any claims. Numerous things can prevent a property from having a clean title.
For example, if there is a property line violation or another problem that breaks the local building codes. These items make the title “dirty.”
A title insurance policy will protect homeowners and lenders against financial loss from encumbrances, property liens, or other defects in the property title.
Common title claims include easements, unpaid property tax assessments, and conflicting wills. The difference between traditional insurance and title insurance is that the latter protects against claims for occurrences in the past.
Simple Owner’s Title Insurance Covers Against Losses For These Things
- Another party having ownership
- Fraud and forgery of deeds
- Unrecorded restrictive covenants and easements.
- Outstanding judgments, lawsuits, or liens against a property.
Types of Title Insurance Policies
As mentioned, there are two types of policies. One is the lender’s title insurance, and the other is the owner’s.
What is a Lender’s Title Insurance Policy?
A lender’s policy protects the interests of mortgage lenders during a buyer’s ownership. Homebuyers are required to pay for a lender’s title insurance policy.
The cost is a one-time premium that becomes part of a buyer’s closing costs. This one-time fee covers the costs for a lender to do a title search to uncover the legal owner of the property.
In any real estate transaction, you must be able to show a clear title and no liens or other encumbrances against the property.
A title company or real estate attorney will be hired for an exhaustive public records search. A chain of titles will be researched to determine proper interests in the property. Title companies conduct a chain of title searches.
Finding out who owns a property is critical to ensure no fraud is committed. Title companies scour the history of houses to determine the correct property owner.
What is an Owner’s Title Insurance Policy?
An owner’s title policy covers a homeowner against claims for title issues such as ownership rights, incorrect records, and fraudulent documents.
The mortgage lender will ask whether the buyer wants to purchase their real estate insurance policy. Home buyers often struggle with this decision because of the hefty expense involved.
Title insurance is not inexpensive, especially when you factor in all the other costs of buying a home.
While it’s a one-time expense, if you are a home buyer and it is the first time you are purchasing a home, it can be challenging to come up with such a large sum of money.
Real Estate title insurance can quickly run into thousands of dollars in a home purchase.
Unlike other types of insurance, it does not carry additional monthly premiums. It’s one and done. It is extra protection that will be there when you need it.
When is Title Insurance Required?
Anytime you get a loan with a financial lending institution, it will be required. It is needed for all types of mortgage loans.
What Is A Real Estate Title Search?
As mentioned, a title search must be conducted to provide a clear title to grant title insurance.
Before a buyer takes title to a property or completes the real estate “closing,” the financial institution through which the buyer gets the mortgage will complete a title search.
The title search is to find any defects in the title. There could be one or more defects in the title, including liens, unpaid real estate taxes, judgments, unpaid condo fees, etc.
If title defects are found, the buyer’s or lender’s attorney will inform the buyer of the flaws and remove them so that a clean and marketable title is given to the buyer.
The title agent will work on this process immediately.
Title insurance becomes extremely valuable when a defect is discovered in the future that was not found when the initial title search was done.
A Title Search Goes Back Many Years
A title agent will start a title search with the most recent deed researching the grantee’s name (the person who holds the title) back in time until the deed from which the grantee acquired the property is found.
That grantor’s name is then searched back in time to find when the grantor acquired the title as grantee.
The typical title examination goes back fifty years, but title insurance would cover beyond the fifty-year time frame.
Anyone with a title insurance claim without the necessary coverage can tell you it is not a pleasant experience!
How Long is Title Insurance Good For?
The one-time fee you pay for the insurance will cover you for the time you own a property. Insurance coverage lasts until you sell the property and transfer the deed to the new owner.
Why is Title Insurance Necessary?
One of the questions I get asked by my buyer clients is, “do you think it’s worth getting title insurance”? An owner’s insurance policy is not required but is worth the expense when considering where you will be if you ever need the insurance.
It can give buyers peace of mind they will be covered in a catastrophe.
The insurance will defend against a lawsuit attacking the title as it is insured or pay back the insured for the monetary loss incurred up to the insurance provided in the policy.
What Are Common Claims Against Title Insurance?
What does title insurance cover?
Some of the most common claims against a title are unpaid taxes, unpaid condo fees, encroachments, easements, property line disputes, conflicting wills, mortgage loan misinformation, and liens against the property.
While most insurance protects you against some future problem, title insurance covers you from past issues that were not discovered.
Can you imagine if you were on the hook for the previous owner’s unpaid property taxes?
What if it was ten’s of thousands of dollars or more?
Specific Reasons For Title Insurance Claims
What are the covered title problems?
Examples of some of the more common reasons for claims against a Real Estate title insurance policy are as follows:
- Impersonating the valid owner of the property fraudulently
- Forgery of the deed, releases, or wills
- Real Estate Fraud
- Undisclosed or missing heirs to the property
- Any Instruments executed under invalid or expired power of attorney
- Mistakes when legal documents were recorded
- Deeds by someone not of sound mind
- Deeds by a minor
- Misinterpretations of wills
- Deeds with misrepresentation of marital status
- Liens for unpaid estate, income, inheritance, or gift taxes
What Does Title Insurance Not Cover?
So now you know what it covers. You might be wondering what it doesn’t protect you against. The insurance will not cover the following:
- Defects in the title you created yourself
- Not paying your primary mortgage or another home loan, such as an equity line of credit
- Not paying your real estate taxes
- Neglecting to pay a special assessment if you live where an HOA exists.
- Problems with the house like mold, radon, termites, or other condition-related issues.
What is The Cost of Title Insurance?
An essential question most people will want to have the answer to is how much title insurance costs. The cost of title insurance will vary, but how much you pay for a home and what state the property is in.
Like other insurances, the amount of coverage plays a significant role in pricing.
You can expect the ballpark cost of a title insurance premium to run around .5% to 1% of the home’s purchase price.
Homebuyers can get a substantial discount when they purchase a lender’s and owner’s policies at the closing table. Getting both insurance policies is called a simultaneous issuance.
Massachusetts runs about $3.65 per thousand for an enhanced policy based on the purchase price from $40,000 to one million. For properties above one million up to eight million, the cost per thousand drops to $2.05.
A simultaneous issuance is a one-time premium paid at closing and lasts the entire time you own a property.
Like any other type of insurance, not having it can be devastating financially when you need it.
Is Title Insurance Tax Deductible?
No, the IRS does not consider it to be a tax-deductible expense.
Why Does an Owner Need a Separate Policy From The Lenders?
Some buyers who question the expense of title insurance will give me a follow-up question as to why they need it if the lender has a policy for themselves.
The easiest way to explain this is to say that the lender’s title policy covers the lender, and the owner’s policy covers the owner.
To go a step further, though, you could ask yourself why couldn’t the attorney who did the title search for the lender be on the hook if he was negligent in doing their investigation.
The answer is they could, but what if they were no longer in business then? What will you do in that situation? In this scenario would have a huge problem to deal with!
It should also be pointed out that an attorney would only be responsible for negligence, not the abovementioned issues. This is the point of having it, to begin with!
An owner’s title insurance policy will defend against the legal fees of clearing the title blemishes. Legal costs can amount to thousands of dollars.
Do You Need Title Insurance With a New Home?
You might assume you don’t need title insurance if you buy a new home. That would be an incorrect assumption. Regardless of purchasing new construction or resale home, you can still have all the title problems discussed here.
RESPA and Choosing a Title Insurance Company
A federal law called the Real Estate Settlement Procedures Act (RESPA) allows the individual homeowner the legal right to choose a company when buying or refinancing residential property.
Most of the time, homeowners do not make these decisions for themselves.
The lender or real estate attorney typically handles these matters; however, a homeowner does retain the right.
RESPA makes it unlawful for any lender, attorney, or Real Estate agent to mandate that a particular company be hired.
It is a violation of federal law, and any person or business doing so can be heavily fined or lose their license.
Section 9 of RESPA denies a seller from mandating that a home buyer use a specific title company as a condition of the sale. Buyers may sue a seller who violates this law for an amount equal to three times the cost of all charges related to the policy.
Who Are The Most Well-Known Title Insurance Companies
A handful of companies dominate the title industry.
The most common title insurance companies are Chicago Title Insurance Company, First American Title Insurance Company, Fidelity National Financial, Stewart, and the Old Republic.
First American Title Insurance Company
First American Title Insurance Company provides insurance and professional settlement services in real estate transactions.
They help all the parties in a real estate transaction close sales. You can visit First American Title when you require a title policy.
Chicago Title Insurance Company
Chicago Title Insurance Company is another firm that excels in delivering title policies. They have been in business for many years and have a sterling reputation.
They have been in business for 160 years and can handle your insurance needs. These two companies are excellent when you want to feel confident about title searching.
Title Companies Near Me
If you would like to learn about other title policy companies besides First American or Chicago Title Insurance company, by all means, do so.
You can search online if you want to research title companies nearby. Head to Google and use title companies near me or title agent near me. You should see some results.
Final Thoughts on Title Insurance
I believe having an owner’s insurance title policy is something every buyer should have unless you can’t afford it. Although it will be a little more costly, you can purchase a title policy in the future should you not have the funds at the closing.
Don’t forget if you live in Massachusetts to purchase additional homestead protection.
Other Real Estate Title Insurance Resources:
- Why does a home buyer need title insurance – get a comprehensive review of why real estate title insurance is crucial for home buyers by Stewart Title.
If you still have questions about title-related issues, this reference should help you with unanswered questions. A qualified real estate attorney should also be able to help as well.
About the author: Bill Gassett, a nationally recognized leader in his field, provided the above Real Estate information on what title insurance is. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for 37+ years.
Are you thinking of selling your home? I am passionate about Real Estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
