For most new home buyers, title insurance is a little understood line item on their settlement sheet, and many consider it just another nickel-and-dime cost involved in buying a home. But like any insurance policy, you'll be glad you have it when things don't go as planned. Learn more about title insurance and what is protects.
First, let's talk titles
Once you've found that great house for sale on HotPads.com, you'll be going through the process of bidding on the home, getting a mortgage and going through the closing/settlement.
With a successful closing, you'll be taking "title" to the home. The title is a term that describes your legal right of ownership, and all previous ownerships and transfers, as well as other claims to the home like those held by mortgage companies that use the house as collateral on loans.
When you buy a home, you expect to have a clear right of ownership to that property. As long as you pay your mortgage and taxes, no one else should be able to claim an ownership or financial interest in your home. Unfortunately, that is not always the case. Since most homes change ownership many times, it is quite possible that sloppy record keeping along the way will lead to problems for future owners. There may be unpaid taxes, claims on old mortgages, liens filed for work done on the home or even forged signatures on transferred titles.
Where title insurance comes in
If any of these problems arise, title insurance protects the insured party for the amount of these claims and any resulting legal fees.
Lender's policy vs. owner's policy
Notice that we said "protects the insured party" and not "protects you." That is because of the fact that in order to get a mortgage, you will need to have title insurance, but that policy is for the benefit of the lender. If you want to be covered, you will need to purchase a separate owner's policy.
These policies differ because you and your lender have differing levels of exposure. Your lender is only exposed for the amount of money owned on the mortgage, and this should decrease over time as you make your payments. You, however, have a financial stake in the entire value of the property.
Like all insurers, title insurance companies will look to minimize their risk. The way they do this is by searching public records to establish a clear history of title transfers and uncover any valid, unsatisfied claims.
Buying title insurance
The good news about title insurance is that it is generally a one-time expense. Purchased at the time of sale, title insurance requires just a one-time-only premium payment. The bad news is that as the buyer, you are typically the one to pay for the lender's policy and your owner's policy.
Other Buyers Guide Topics
Jump back for the index of articles on real estate settlements.
Other Web Info
An article about title insurance costs from CNNMoney.com.