Let’s imagine that you’ve bought a shiny new home built on a nice piece of land on a quiet cul de sac in a newly developed part of town.
Now imagine that not long after you move in, you get a call from a lawyer representing someone claiming to be the property’s rightful owner and saying that your home sweet home is — legally — anything but yours.
Believe it or not, there are title-related issues in just about half of all real estate transactions in the US.
Titles and title searches
What is a title? It’s the document that proves that an individual legally owns a property. And a title search is exactly that, a legal review conducted to look at all past titles for the property and try to weed out any discrepancies. Optimally, the title search is done BEFORE the sale of a property is finalized, saving everyone involved a lot of headaches.
Just what is title insurance?
Most people take out insurance to protect themselves against things that may or may not happen in the future. Homeowner’s insurance covers potential losses that may occur from floods, fires, tornados and other mishaps. Car insurance protects you against financial obligations that might come due to a future auto accident. And life insurance is available to protect your family from future financial obligations in the event of your death.
Title insurance, on the other hand, protects you from messed up stuff from the past — such as another person claiming an ownership interest, back taxes still owed, conflicting wills, improperly recorded documents, fraud, forgery, liens, encroachments, easements, unpaid contractor bills and more — all of which are called “defects.”
2 types of title insurance.
There are two types of title insurance: Owner’s Title Insurance and Lender’s Title Insurance.
With Owner’s Title Insurance, the home buyer is protected from title-related issues that spring up, even after a thorough title search. The cost of this insurance is not based on the amount you’re borrowing to buy the home; it’s based on the home’s total cost. And typically, it’s valid for as long as you remain the homeowner.
Lender’s Title Insurance, on the other hand, only protects the lender (like Movement), and the policy cost is a percentage of the amount being loaned to the buyer, not the agreed-upon sale price. As the buyer pays down the principal every month, the total policy coverage also shrinks. Once the loan is paid in full, no more policy or policy payments.
Do I even need title insurance?
You may be buying the home, but as long as you owe money against it, your lender is also your co-owner. And, at least initially, the lender is probably the majority owner of the property. To protect their investment, they will undoubtedly require a Lender’s Title Insurance policy.
So, that leaves the Owner’s Title Insurance policy. Why would you bother taking out an Owner’s Title Insurance policy if your lender requires you to take out Lender’s Title Insurance?
Good question. Owner’s Title Insurance is not mandatory, but remember, the Lender’s Title Insurance policy only covers the borrowed total, not the home’s full value. Homebuyers typically take out Owner’s Title Insurance to protect their skin in the game, including the cash they’ve put down for a down payment and the equity they’ve invested in the principle.
OK, you’ve convinced me that I need title insurance. How do I get it?
Not so fast. Before getting a title insurance policy, a title search is conducted to ferret out title issues from the past. If there are any, it’s the seller’s responsibility to resolve the problems. If your seller neglects to clear the title — which will usually cause the insurance company to pull back from offering coverage — the buyer assumes all potential risk. You don’t want this, so step away from the baggage if this scenario becomes a reality for you.
If the seller takes care of all issues and the property title is clean and clear, you’ll be offered a title insurance policy that states the following:
- A thorough title search was completed on the property.
- Any issues unearthed in the process were either solved or accounted for by the title insurance policy.
- The provider of the title insurance covers all issues included in the policy as long as collectively they do not exceed the cost of your home.
Who pays for title insurance?
Another good question. Laws dictating who pays for title insurance differ from state to state. They can even vary within the state, depending on the county the property is in.
The cost of the Lender’s Title Insurance typically falls on the buyer since they’re borrowing the money from the lender.
When it comes to Owner’s Title Insurance, it’s a negotiation between buyer and seller as to who will pay. Because it’s an optional form of insurance, sellers are less inclined to pony up the cash, but many do to ensure a clear title and provide a smooth closing.
Regardless of who pays, it all comes out in the wash during the closing. So ask your lender if you’ll need to bring another check!
Ready to chat with a loan officer?
There you have it, a good primer on title searches and title insurance. A Movement Mortgage loan officer will be able to tell you more. Reach out when you’re ready to discuss financing!