How Title Insurance Works
As highlighted above, title insurance is designed to protect both the mortgage lender and the homebuyer against financial loss, due to problems or defects in a property’s title.
So, how does title insurance work? Well, title insurance is mainly a two-step process. First, a title company will conduct a title search to determine the status of the property’s title.
A title search is mostly an examination of public records, to determine and confirm that the person selling the home is the rightful owner of the property.
Apart from confirming ownership, a title search will also help to unearth any issues or claims on the property. Unresolved building code violations and erroneous surveys are some of the issues that may put blemishes on the property.
Once the title search is completed, then the title company will proceed to the second step. The second step is mainly the underwriting process.
During the underwriting process, the title company will assess the issues if there were any in step one, and then give a quote for the title insurance policy, in line with those risks.
And if there are too many issues, errors or defects with the title, then the title company may refuse to offer a policy.
What Title Insurance Covers
Title insurance can help to indemnify both the mortgage lender and the homebuyer from having to fix issues with a property’s title.
So, in case a dispute arises during the transfer of the property’s ownership, then the title insurance will kick in. It will protect against financial loss. Some of the issues that the title insurance can provide coverage for include:
- Fraud or forgery
- Filing errors
- Undocumented easements
- Conflicting wills
- Issues with the transfer of the deed
- Missing information
- Back taxes
- Disputes related to ownership
And as with other forms of insurance, you can expand your title insurance coverage by adding riders or policy endorsements. Some of the policy endorsements that you can add to your title insurance include:
- Building ordinance violations
- Subdivision restrictions
- Border line disputes
- Zoning violations
- Private restrictions violations
- Third-party easements on your property
Your title insurance company will give you a document known as title commitment before closing. This document will provide all the details about your title insurance policy, what is covered as well as the terms and conditions. So, make sure you read this document carefully before signing the final paperwork.
Types of Title Insurance
There are two main types of title insurance. These are lenders' title insurance and owner's title insurance. Let’s take a closer look at each of them as well as what is covered.
Lenders Title Insurance
As the name suggests, lenders title insurance is designed to protect the mortgage lender against financial loss, in case there is a dispute with the property’s title.
So, if you are using a mortgage to finance the purchase of your home, then the lender will require you to have this insurance before closing.
Also called loan policy, lender's title insurance will last until the homebuyer has paid the mortgage in full. In case a lawsuit is brought against the lender, then the lenders' title insurance will compensate the mortgage lender.
It’s important to note that as much as the homeowner is paying for the lender’s title insurance, it will only protect the lender.
And this explains why the lender will require the homeowner to purchase the insurance before issuing a mortgage. In simple terms, it protects their interests during the transaction.
Hence, if an issue with the deed comes up, then their financial stake will be adequately protected.
Owners Title Insurance
As discussed above, the lender's title insurance will only protect the lender’s interest during the transfer of property ownership. So, if you are a homebuyer, you will also need some form of financial protection.
And this is where the owner's title policy comes in. Also known as homeowners title policy, the owner's policy will protect the homebuyer in case there are title defects.
You may be probably asking yourself why you should bother purchasing owner's title insurance. Well, this insurance policy will come in handy in several situations.
For instance, the previous homeowner may have suddenly passed away, leaving various liens against the property like unpaid taxes, unpaid HOA fees or unpaid bills.
The problem is, the people owed will not care whether you had anything to do with those issues. They may still come after you and require you to sort those issues attached to the property.
You may also encounter a situation where a newly discovered will states that the seller had bequeathed the property to another party. As you may expect, you will face a court battle, which may cripple you financially.
But as long as you have owners title insurance, then your policy will financially compensate you so that you can deal with the unresolved debts, legal expenses and other property disputes.
Cost of Title Insurance
On average, title insurance costs around $1,000 per policy. However, the exact amount will vary from one state to the other, among other factors. Some of the factors that will determine the cost of title insurance include:
State the Property is Located
Different states handle title insurance differently. For instance, in Texas, New Mexico and Florida, premiums are fixed by the state insurance department. Hence, everyone pays the exact amount, regardless of the situation.
In Iowa, the state insurance department underwrites the title insurance itself, leading to some of the lowest premiums on the market. For example, you will only pay $110 for a home costing up to $500,000.
And if you live in a state where the insurance companies have the freedom of setting their rates, then the cost may go up to thousands of dollars. So, ensure you shop around and compare the rates.
Price of the Property
Title insurance policy premiums are usually calculated based on the value of the property or rate per thousand. Some insurance companies set the rates using a tiered basis.
For example, if you are buying a house worth $300,000 and the insurance company is using a fixed rate of 0.6% for every $1,000, then the title insurance will cost you approximately $1,800.
On the other hand, if the insurance company is using a tiered basis, then the rate per thousand maybe something like 0.6% for the first $100,000 and 0.5% after that, then your title insurance premium will be approximately $1,600.
Age of the House
As you may expect, older homes tend to have previous multiple owners. And this means that the title search may require more effort and time. Consequently, the cost of title insurance for such homes may be higher, compared to newer homes.
Basic owner’s title insurance doesn’t cover everything. In fact, it will only cover the homeowner against undiscovered claims made prior to the sale. So, it will not cover the homeowner against claims that may arise after the sale goes through.
As the homebuyer, you may decide to extend your coverage to protect you against additional defects or issues that may arise after you’ve purchased the property.
Such issues may include things like a neighbor building on your property, previous permit and zoning violations by the previous owner or other issues that may have not been discovered during the title search.
Depending on the riders added to the policy, extending your coverage may add a cost of approximately 15% to 50% on top of your standard fee.
How to Save on Title Insurance
If you are buying a property in Texas, Florida, New Mexico and Iowa, then you will have to pay the same amount for title insurance as everyone else. But if you live in other states where the market determines the rates, then you can save money on title insurance. Here are some tips on how to save money on title insurance:
Ask the Seller to Pay for Title Insurance
This is the simplest method for saving money on title insurance. If you are in a situation where the market favors the buyer over the seller, then you should ask the seller to pay for your title insurance policy.
Your mortgage lender may recommend a certain title insurance company. However, you should not feel compelled to use that company. Instead, you should shop around, compare the rates and then choose a company that offers the best value for the money.
Bundle the Policies
Some title insurance companies may give you a discount if you opt to purchase both the lender's insurance and the owner's insurance policies from them.
Negotiate the Rates
Shopping for title insurance is just like shopping for anything else. You are within your rights to negotiate with the seller. And if you don’t like the quoted fee, then you should try to negotiate with them.
You can also request the insurer to remove some of the add-on fees if you feel they are unreasonable. If the insurer is not willing to negotiate the rates, then you should feel free to look around for another company.
If you are buying a home, then it will be a wise choice to have title insurance. Even if the lender's title insurance will not be required, you should still consider buying for yourself. Title insurance will protect you against financial hardship, in case the property’s title has some defects or issues. And with so many options on the market to choose from, it should not be hard to find title insurance that aligns with your budget and needs.