Buying a home is one of the biggest investments a person can make in their lifetime. Therefore, it is important to be informed about the steps in involved in the homebuying process. Title insurance makes up a portion of the closing costs associated with buying a home. Title insurance protects the lender (bank) in the event that the title is “bad.”

Today we will explore title insurance and the important role it plays when buying a home.

What Is A Title?

According to Investopedia, a title is a legal document showing an asset or property ownership. A title can represent various things such as ownership of physical assets like a car or intangible property such as a trademark.

Title insurance is a type of indemnity insurance that protects lenders(banks) and homebuyers from financial losses from defects in a property title.

The most common kind of title insurance is called lender’s title insurance that is bought by a homebuyer to protect the lender (banks)

Unlike traditional insurance that protects policyholders against future events, title insurance protects policyholders against past occurrences.

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What Is Intangible Property?

Intangible property is an item of value that cannot be physically touched. Intangible property isn’t just for individuals. Companies can have intangible property, too, in life insurance contracts, copyrights, patents, trademarks, and more.

What Are The Components Of A Title?

A title has three components: ownership, occupation, and the right of possession. There are countless titles; however, individual property and real property titles.

Personal Property Titles

Personal property titles give people the right to own things that aren’t classified as real property. Personal property is most often divided into two categories. The first involves corporeal personal property, which essentially refers to all property that is tangible/physical. The second involves incorporeal personal property, which refers to intangible/non-physical property. This personal property includes patents, stocks, copyrights, and trademarks.

Real Property Titles

In contrast to personal property, real property such as cars and real estate is given a title that proves ownership. The property title is transferred to the individual buyer whenever an asset is sold. All personal property sold to another party needs to be lien-free and debt-free before the property title can be transferred to the acquiring party. This is called a clear title- a title that is free of creditors claiming ownership due to unresolved debt from the previous owner.

If a title is not clear, it is called a bad title. This is where title searches come in. A title search is a service provided by a title company that ensures no liens, debts, or issues with the title that would interfere with the sale of the asset in question.

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Types of Real Estate Titles

Real estate titles can come in several different types.

However, the main types are:

Tenants By Entirety

It is a title that proves the ownership of a legally married couple’s ownership that treats them as one individual. Therefore, if one partner dies, the widow(er) will get the title in its entirety.

Tenancy in common

It is a title that involves two or more people who hold a real estate title jointly. Individually, these tenants in common hold a title for their piece of property. This title can be transferred or encumbered.

Joint Tenancy

It is when two or more people hold a real estate title jointly, which gives both parties equal rights to that property during their lifetime.

Community Property

It is a title for married couples who intend to own property together during their marriage. Each partner has the right to transfer or sell half of the property to another party. Excluding real estate, all property acquired during marriage is community property.

Sole Ownership

It is a title when one person or entity holds a title. These titles are typically for single people or married individuals that hold property apart from their partners.

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Types of Car Titles

Junk Title

It is when a car is sold to a junkyard for the sole purpose of destroying it or selling it for parts.

Reconstructed Title

It is a title granted by an insurance company when a car has been severely damaged and rebuilt to be driveable.

What Does Title Insurance Do?

Title insurance protects the interests of both homebuyers and lenders against financial losses that could be incurred if there is a bad title.

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Types of Title Insurance

There are only two kinds of title insurance:

Owner’s title insurance and Lender’s title insurance.

Practically all lenders (banks) require the borrower to buy a lender’s title insurance policy to protect the lender (bank) if it later turns out that the seller was in no legal position to transfer the title of ownership rights. Now, a lender’s policy just protects the lender(bank) from financial loss.

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How To Buy Title Insurance

Typically, a closing agent will start the insurance after completing the property purchase agreement.

Both a lender’s policy and an owner’s policy are often required to ensure that all parties involved are protected. At closing, both parties buy title insurance for a one-time fee.

Speaking of title insurance, Lemonade offers one of the most affordable packages you’ll ever come across out there. But one thing you need to note is that the cost of your title insurance depends solely on the state where you reside, how much you wish to borrow, and where your house is located in your state. Typically, the costs range between $400 to $1600, which you’ll need to pay once.

Try Lemonade

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How Much Does Title Insurance Cost?

The total owner’s title insurance cost ranges between $500 and $3,500. However, it depends on where you live, the insurance company you use, and the home’s purchase price.

In the United States of America, there are four major Title Insurance providers:

  • First American Title Insurance Company
  • Old Republic National Title Insurance Company
  • Fidelity National Financial
  • Stewart Title Guaranty Company

Interesting Fact: The Real Estate Settlement Procedures Act (RESPA) forbids sellers from requiring buyers to purchase from a specific title insurance company to prevent abuse.

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Why is Title Insurance Important To Have?

Title insurance is essential because it protects the buyer for as long as they own the property.

What Happens If You Don’t Have It?

Having no title insurance will expose parties to a significant amount of risk if there is a defect in the title. If there are unpaid property taxes, those expenses now fall on the buyer.

Real estate investors must ensure that a property doesn’t have a bad title before moving forward with a purchase.

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