How does title insurance work?
When you buy a home, you are given a title to the property, which generally means you receive full legal ownership. Sometimes, there is a hidden mistake in a prior deed, will, mortgage, etc., that may give someone else a valid legal claim against your property!
For new homebuyers, title insurance protects against loss if a covered defect is found in the title to your home. It offers you information on the status of the title to land before you buy or refinance and protects against title claims that may affect the title after you buy. Having title insurance can save you money, time, trouble, even your home!
How does title insurance work?
According to the American Land Title Association, title companies find and fix problems with the title in 25% of transactions – usually without the the borrower or lender even knowing it! In addition, title companies pay millions of dollars each year in claims. Title insurance provides significant value to lenders and homeowners.
Before closing, Realty Title searches the public records for all matters affecting title. The search entails examining the records in the offices of the Register of Deeds, Clerk of Courts, and other municipal and county officials. These records include recorded documents, judgments, liens, taxes, street easements, sewer assessments, special taxes and other matters that could affect property ownership.
Through careful examination of these records, we determine who owns the property and what interests may already exist in that property. This process, called a title search, provides early warnings of title flaws that must be dealt with before the property can be sold or refinanced.
In those transactions where title insurance is involved, the title company must determine insurability of the title as part of the search process. This leads to the issuance of a title policy, which insures the existence or non-existence of rights to the property.
The title insurance company will, at its own expense, defend the title and will pay losses within the coverage of the policy if they occur.
How does title insurance differ from other types of insurance?
Title insurance is substantially different from other types of insurance coverage. Title insurance emphasizes risk prevention rather than risk assumption, so the coverage offers the best possible opportunity to avoid claims and losses in real estate transactions.
Because of the important corrective work that title professionals perform, it is rare for lenders or homeowners to suffer a loss under their title insurance policy.
The majority of the title insurance premium goes toward the exhaustive research and due diligence work done by Realty Title upfront, while a small percentage goes toward the payment of claims.
Title insurance is charged only once at closing, where other forms of insurance typically require monthly or quarterly payments.
Types of Title Insurance
- The Lender’s Policy
There are two types of title insurance: Lender’s title insurance and Owner’s title insurance. Most lenders require a loan policy when they issue you a loan. The loan policy is usually based on the dollar amount of your loan. It protects their investment (the mortgage) and protects them against loss should a title problem arise. The policy amount decreases each year and eventually decreases as the loan is paid off.
Lender’s title insurance only protects the lender. It does not protect the owner. A lender’s policy protects only the lender’s interest in the property should a problem arise. It does not cover the owner’s equity in the property, and will not pay the homeowner’s legal expenses if there’s a title problem. Only an owner’s title insurance policy will protect the homeowner.
- The Owner’s Policy
Owner’s title insurance is usually issued for the amount of the real estate purchase. You pay a one-time fee at closing and lasts as long as you or your heirs have an interest in the property. This may be even after you have sold the property. Only an owner’s title insurance policy fully protects the homeowner should a title problem arise that was not uncovered during the title search. An owner’s policy can also protect you by paying for any legal fees involved in defending a claim to your title.
What does an owner’s policy provide?
- Protection from financial loss due to claims against the title to your home, up to the face amount of the title policy.
- Payment of legal costs if the title insurer has to defend your title against a covered claim.
- Payment of successful claims against the title to your home covered by the policy, up to the face amount of the policy.