For most people, their homes are usually the largest purchases of their lives. So, they must protect their financial investment against risk and uncertainty. The last thing you will want will be to be involved in a legal case regarding the ownership of the home after you have purchased it. That’s where title insurance comes in.
When purchasing a new home, one of the essential things to do is title insurance. This type of insurance confirms that you have the legal right to a property and have acquired all the ownership rights from your seller. If you end up getting tangled up in some legal or financial purchase problems after purchasing the home, you may be subject to a hefty bill that even exceeds your purchase price. This insurance coverage will help you get out of such a sticky situation. This piece will take a detailed look at the meaning of title insurance and other important aspects of it.
Definition of Title Insurance
In simple terms, title insurance is a unique insurance policy that is designed to home buyers or lenders from any damages they incur on their new home as a result of a bad title. The title is a term that refers to the right of ownership of the building or property. These damages may be due to a third-party claim on the request of the property that didn’t appear in the initial title search. A third party could be anyone, such as the plumbing company, that didn’t get paid by the previous owner for some work done on the property.
When you purchase a new home, you must do your best to ensure that the house has a clear title and is free from liens or any ownership claims that may affect you. However, there have been cases where people have been subject to claims that were not found in the US Recorder of Deeds. As long as this third party has some old and legally binding documents to affirm their claims, they can challenge the title of your home. Depending on your policy and agreement with the insurance provider, the company will take care of the expenses and legal damage incurred due to this title dispute. But if it was later revealed that these documents were forged and only a fraud case, the title insurance will cover the bills for perfecting your rights.
The weird thing about title claims is that they could happen anytime. It doesn’t matter if you have just purchased the home or have stayed there for a few years; a title defect and unexpected claim could still arise from nowhere. Someone out there could have a claim to your property that they weren’t aware of. Even the previous owner may be oblivious of the existence of such a claim. However, it doesn’t stop the third party from contesting your ownership of the property.
Typically, a title insurance policy will protect homeowners and lenders from any of the following;
- Third-party ownership claims
- Incorrect signatures on legally binding documents, including cases of forgery and fraud.
- Incorrect records
- Restrictive covenant, such as unrecorded easements
- Encumbrances or any court judgments
What are Title Defects?
A title defect will give a third party the right to claim property ownership. Depending on the scenario, these defects may include any or all of the following;
- Liens: These types of defects can be placed on a property by a lender, tax authority, or contractor who hasn’t been paid a certain bill. It’s a bad idea to get stuck with someone else’s unpaid bills.
- Easements: This defect explains someone else’s rights to use your property even if you are its legal owner. For instance, if utility lines are installed across your backyard, the utility company that owns this infrastructure will have an easement giving them access to the utility lines at any time they intend to work on these lines. An easement could impair your rights to use your property as you deem fit.
- Encumbrances: This defect includes liens, easements, zoning laws, or restrictive covenants issued by homeowners association and leaseholder rights.
Before the purchase is completed, the title company will look through public records such as divorce decrees, tax records, deeds, child support orders, court judgment, and mortgages. If any problems arise during this search, the title company will immediately try to resolve them. In certain scenarios, your real estate agent will have to work with the seller’s agent to deal with the problem. If the issue refuses to go away or can’t be resolved amicably, this title claim may derail the entire sale.
Types of Title Insurance
There are two types of title insurance that new homeowners and lenders can sign up for. They include; lender’s title insurance and owner’s title insurance.
Owner’s Title Insurance
Often, the owner’s title insurance is purchased to prevent any potential hazards caused by title claims. It’s not compulsory to have this type of insurance coverage, but it will give the buyer or new homeowner peace of mind. Remember that there may be some issues that a title company would not spot during your attempts to purchase the property. These types of problems come up after the whole deal has been finalized.
It’s up to the new owner or buyer to book this insurance coverage, but it protects the person from any of the following risks;
- Ownership claims, such as family disputes and conflicts
- Outstanding Liens, lawsuits, and encumbrances that invalidate the seller’s claim
- Error-filled records, including simple mistakes like incorrect signatures
- Fraud/Document Forgery
- Undisclosed easements and similar agreements may limit the buyer’s property usage and reduce its value.
Lender’s title insurance
If you are working with a lender, such as a mortgage company, to get your new home, they will request for the lender’s title insurance to protect them from additional costs and losses that may occur as a result of a title claim. Before your home loan is finalized, you will be asked to present documentation for this insurance coverage. The purpose of the lender’s title insurance is the same as for the owner’s title insurance. The lender will be covered on the amount of mortgage that has been issued. Note that only the lender is protected in such a scenario, and you may be subject to certain financial losses. For instance, if you are subject to back taxes but don’t have adequate insurance protection, a lender’s policy would not cover such costs.
For personal protection from the negative effects of title claims, you need to book the owner’s title insurance.
How Much is Title Insurance?
The cost of title insurance varies from one state and insurance provider to another. However, it could cost anything between $500 – $3,500. If the seller has purchased this policy to protect themselves, the cost would be added to the property’s final value.
Conclusion
And that’s all on title insurance. Now, you’re aware of the meaning of title insurance and other important aspects of it. If you’re interested in purchasing a new home, you should buy this policy to protect you from indemnity and unexpected financial losses. When you have title insurance in place, you may only have to relinquish ownership of the property without suffering any additional financial losses.