Are you shopping for a home? Purchasing your first house/apartment is a huge step, both financially and emotionally. It’s one of the largest purchases a person makes in their lifetime.
Therefore, homebuyers should ensure no ownership issues stand in the way of their transaction. Protection against ownership problems is obtained through title insurance. When taking out a mortgage, such insurance costs are part of the closing expenses.
Since these policies protect not just lenders but buyers as well, you should get familiar with both types of policies. Although many individuals consider it a poor investment, title insurance protects against financially devastating consequences.
If interested in Real Estate Title Insurance, the information below will introduce you to the concept.
What is it?
Title insurance protects both homebuyers and mortgage lenders against any issues related to property ownership transfer. The title to a property is a term describing the legal rights the owner has over it. When purchasing a home, it’s paramount for it to be free of any liens or other claims linked to ownership.
Title insurance policies cover claims from third parties on the property a person purchases. A third party refers to somebody other than the owner of the property, such as construction, remodeling, or plumbing company that received no pay for its work on the house/apartment while still owned by the previous owner. It offers protection against potential claims against the property before the purchase. Protection is based on the policy limits. Nevertheless, new claims against the current owner aren’t covered.
Before closing a mortgage, lenders request a title search to look for possible defects by searching through public records. These defects can be liens, encumbrances, or easements, all of which affect property rights. For instance, liens could get placed on real estate by a tax authority, lender, or contractor who hasn’t received payment for its work. The last thing a home buyer needs is to end up paying the bills of the previous owner.
Easements provide a person or an entity with a right to use your property for a particular reason, although you are its sole owner. For instance, public utility companies tend to have easements that provide them with access to homes where utility lines are installed in the backyard. They must use easements whenever the lines need to be serviced or repaired. Check out how an easement works.
Ultimately, encumbrances refer to both liens and easements, along with leaseholder rights and zoning laws. The public records searched through by title companies include court judgments, deeds, mortgages, child support, tax records, divorce decrees, etc.
Homebuyers should get familiar with the two title insurance types available for purchase, a lender’s and owner’s policy. The former, as the name explains, protect the financial interests of the moneylender from liability during the entire lifetime of the mortgage. Lender’s title insurance has to be purchased when taking out a mortgage, either for purchasing a new home or refinancing.
The latter, on the other hand, serves to protect the homebuyer. This policy isn’t classified as mandatory, but homebuyers are strongly advised to invest in it to better protect their investment. Even in the scenario of being provided with a warranty deed, this policy helps homebuyers cover the expenses in the event of a future ownership issue. It only should be purchased once, but it provides long-term protection, as long as you own the property.
How does it work?
It’s of the utmost importance for homebuyers to understand how real estate title insurance works to set the right expectations. An owner’s policy can cover the expenses linked to an undiscovered former lien or the costs incurred by a lawsuit filed against you by a person claiming to have ownership rights to your property. Title claims might occur at any time, regardless of how long you have owned your house/apartment, without any problems. It sometimes happens for an overlooked heir to claim on the property years after you have made the purchase.
Nevertheless, an owner’s policy doesn’t offer protection against other types of infringements. For instance, you receive no protection in the event of title issues induced by your actions. Such actions might include not paying your property taxes or the contractor that had your roof replaced.
Also, there it offers protection when it comes to eminent domain, referring to the act of seizing private property by the government for public purposes. Follow this link, https://en.wikipedia.org/wiki/Eminent_domain, to understand the meaning of eminent domain.
In other words, you won’t be protected against any issues that are created after buying your home. The policy, however, provides coverage against problems that may have influenced your decision to make a purchase. Given the lender’s policy, homebuyers aren’t very concerned, as it doesn’t protect them. Nevertheless, since you will be paying for it anyhow, you should gather information about it as well.
In a scenario of losing your home due to a fraudulent sale, you won’t be required to continue paying the mortgage. The moneylender will file a claim with the insurance company to cover the mortgage payments expected to receive from you.
Why do you need it?
When it comes to lender’s title insurance, mortgage lenders consider it mandatory and oblige homebuyers to purchase it. In contrast, an owner’s policy is optional. Paying for this policy, however, is highly recommended to protect yourself from title issue responsibilities.
If you don’t purchase such insurance and a problem occurs in the future, you will be held responsible for dealing with it. Let’s assume the previous owner failed to pay property taxes. In such a case, the municipality is likely to place a lien on your home, which cannot be removed until taxes are paid.
How much does it cost?
Homebuyers will be pleased to learn that title insurance is a one-time fee paid upfront. The cost of the policy an owner’s policy is the purchase price of a house/apartment, whereas a lender’s policy depends on the amount of the loan. Nevertheless, both policies cost approximately 0.5% to 1% of the purchase price.
For example, a $200,000 home would cost you between $1,000 and $2,000 for title insurance. In certain states, the insurance price is the same across insurers, whereas, in others, you can shop around to save money. This premium is usually paid at the time of closing.
The bottom line
Homebuyers should never consider real estate title insurance policies as unnecessary and a waste of money.
Paying a small price will protect your current interests in the event of an issue!