When you’re about to close on a house, it feels like there are a hundred things that could go wrong. You consulted with your realtor to understand the ins and outs of the purchase. However, it’s easy for them to overlook issues with the title, which might put your status as the owner of the property in danger and cost you big in the future. Title insurance remedies this. It’s important that you mitigate the costs that could arise from unscrupulous practices and outright fraud.
Table of Contents:
- What is title insurance?
- What does title insurance protect?
- How much does title insurance cost?
- Is title insurance necessary?
- What to watch out for when purchasing title insurance
- Final Thoughts
What is title insurance?
In short, title insurance is a type of indemnity insurance that protects you from the financial losses you can incur from issues in your property title. Common issues with your property title include defects to the scope of the title itself and voided or unenforceable mortgage loans. In lawsuits, you will have more breathing space as the insurance will cover any costs if there are uncertainties regarding your title. Most importantly, your title insurance will ensure that you maintain possession of your property even if there is an error.
What does title insurance protect?
Title insurance protects both you as a buyer as well as the lender that is responsible for your mortgage. Ideally, you should ensure that you purchase an insurance plan that covers both. Otherwise, you could be on the hook for issues like undisclosed liens on your property while your lender is absolved.
In general, we can say that title insurance protects your finances by ensuring you maintain a claim to the property title. Here are some different ways that your title can be impacted:
1. Property encroachments
Title issues often arise when somebody encroaches on your property. For instance, a neighbor could build accidentally build a fence on part of your yard. The stakes only get higher with larger properties, in this case, many disputes occur over land that was poorly surveyed or worse.
2. Document forgery
Unfortunately, fraud is another risk to your property title. It might seem improbable, but there is potential that the property has a history of forged documents. Moreover, the sellers themselves might mislead you through nefariously obtained documents.
3. Unenforceable contracts
There are two ways your contract could be rendered unenforceable. First, the instruments of the contract could have been executed under an expired power of attorney. Second, deeds could have been made with someone who was misrepresenting themselves, for instance, a minor or a married person who was presumed single.
If you’re selling your home, you might also realize that having title insurance is quite useful. A lot of buyers can be uneasy about properties that don’t have an insured title. Of course, this is because they don’t want to run into one of the several problems mentioned in this article. Best of all, you might be able to command a premium on the sale price if your house is insured.
How much does title insurance cost?
There appears to be some disagreement over the average cost of title insurance. While the most commonly cited figure is $830, Value Penguin estimates that if you account for both lender’s and homeowner’s title insurance, you will pay roughly 0.5 to 1.0% of the value of your purchase. In the case of refinance loans, the insurance will cost closer to 0.5%. Not to mention, the cost of title insurance also depends a lot on where you live, as there are more risks associated with certain areas.
Is title insurance necessary?
While it’s true that nobody will require you to buy title insurance, it’s a small expense relative to the title you’re trying to protect. Would you rather take a guaranteed $1,000 loss or a potential loss of hundreds of thousands of dollars?
If it still seems like it’s not necessary or the price is too high, here is a selection of some of the services you are purchasing when you acquire title insurance:
Real Estate Fees
- Title search fee
- Endorsement fees
- Deed preparation fee
- Wire fee
- Settlement fee
- Notary fee
Documents
- Document preparation
- Emails and e-documents
Government Fees
- Tax certificates
- Government Recording changes
As you can probably tell, there is a lot that goes into creating your title insurance plan. There are many documents that need to be verified. You should get this verification process out of the way now rather than later when you’re facing a lawsuit questioning your title. In this scenario, the problems can only compound as an official will likely check the whole title, not just the aspect in question, when you face a legal challenge to your title.
What to watch out for when purchasing title insurance
When you purchase title insurance, you must hire an insurance company. Before you discuss a potential policy with them, you should inform yourself of some of the other details relevant to your title insurance.
Homeowners and Lenders
Firstly, you should watch out for whether your policy covers both yourself as a homeowner and the mortgage broker as a lender. Sometimes, insurance policies only cover lenders while buyers assume that they are covered too. Remember to check that you’ll be covered.
Policy Exclusions
Another issue that appears when you purchase title insurance relates to policy exclusions. When the insurer conducts a title search, they will research the existing title thoroughly and identify any risks that are already known. Afterward, they will make sure to exclude any potential issues with the title that already exist, meaning you won’t be covered if legal consequences arise. Of course, you could always ask for a lower price from the property seller if the insurer identifies significant risks to the title.
Standard vs. Extended title insurance
Finally, you should be aware of the difference between standard and extended title insurance. As the name suggests, standard title insurance covers most of the things we’ve talked about so far in this article. Meanwhile, extended title insurance is more expensive and is typically suited for large purchases. Perhaps most importantly, the amount that the policy covers increases every year to reflect the yearly increase in property values.
An extended policy goes to greater lengths to insure you against title risks such as forgery and unenforceability. Moreover, they will make an extra effort to ensure that every aspect of the title has been accounted for. For example, when you’re buying a large piece of land, it’s helpful that they hire a surveyor to come and map it out for you in detail. That way any zoning issues or property encroachments are mitigated.
Final Thoughts
Title insurance is an underrepresented aspect of homebuying and not one to neglect. It’s important that you protect yourself from risks to your title such as property encroachments, seller fraud, and simple human error. After purchase, these issues could even throw your entire ownership into question. No matter what type of policy you choose, you risk paying far more than you should if you refuse to pay for title insurance upfront.