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Of the many types of insurance policies that are offered today, a title insurance policy is perhaps the least understood. It is an important policy that represents a significant part of closing costs when buying a home. Your lender may request a lender's policy title insurance to protect its investment in your property. When you buy title insurance, it ensures that you have the right to own, use, and sell your property.
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How Does a Title Insurance Policy Work?
There is an important distinction between title insurance and other types of insurance. Title insurance emphasizes risk prevention. It protects you from defects to the property title arising from past actions. All other types of insurance policies, such as a fire or a home insurance policy, are based on perceived future risks. A title insurer provides two services for the one-time premium that you pay at the time of your home closing.
The insurer performs a title search of your property to verify that it can be transferred to you free of any liens, taxes, or other encumbrances. This involves examining court judgments, documents, payment records, liens due to unpaid dues as well as pipelines, utility, road, and other easements across your property. According to The American Land Title Association (ALTA), defects are found in about 25 percent of all title searches. The title insurer ensures that such “clouded" titles are cleared or corrected before the closing of your home. It is estimated that about 80 percent of the cost of the premium is used for this purpose.
The other service provided by the title insurer is to protect you from losses that might arise from errors not detected during the title search. This includes claims of undisclosed heirs to a whole or a part of your property, fraud and forgery, and mechanics' liens. The title insurance company will pay any valid claims and bear the cost of attorneys’ fees payable in the future to safeguard your title to the property.
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Types of Title Insurance Policies
There are two main types of policies offered by title insurers. If you are buying your home with a loan, your mortgage provider will require a Lenders’ Policy or a Loan Policy. It is an assurance that there are no other liens on the property other than that created by the present mortgage. This policy will cover the amount of the mortgage and will decline in value as the loan gets repaid. A Home Owner’s Policy is purchased by you and will be effective as long as you or your heirs own the property. A title insurance company issuing a Loan Policy will agree to simultaneously issue an Owner’s policy for a marginal increase in the premium.
Whose obligation is it to get title insurance? Title law and practice depends on local customs. In some states, it is the seller who obtains this. In others, it is the buyer’s responsibility to get both the lenders’ and owner’s title insurance policies.
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How Much Does Title Insurance Cost?
Some states have fixed the premiums for title insurance. It is a one-time fee based on a stepped up rate linked to the price of the property. In other cases, rates are fixed by title insurance companies. If you are shopping for rates in a state where the premium is fixed, inquire what other services are provided by the title insurance company and how fees are charged. Some companies conduct the home closing, attend to extra endorsements required in the policy, as well as prepare and notarize loan documents. Compare services offered by different insurance providers and fees quoted to get the best deal
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How to Find a Title Insurance Company
In most cases, your real estate agent or lender will recommend a title insurance company. However, you are free to check on services provided by other title insurance providers as well. Ask for referrals from friends or neighbors, and compare prices and services. You may also call your state insurance provider, or inquire about service from the Better Business bureau in your area. You can also use this resource provided by ALTA.
To summarize, a title insurance policy is an important document. It ensures that you own the property your home is built on and can legally transfer ownership to another. For lenders, it ensures that their investment is protected. A title insurance policy fosters confidence for those dealing in real estate investments.