Title insurance companies write two kinds of insurance policies. The most prevalent are policies that protect the interests of the mortgage lender should there be a problem with the title. Should the borrower default, lenders want to be able to foreclose and take possession of the property without worrying about outstanding claims?
What Title Insurance Covers
Title insurance policies also cover the cost of resolving (also known as curing) most title problems (also known as defects) uncovered during the title search. Common defects include, but are not limited to, the following:
- Tax liens (for unpaid taxes)
- Construction liens, also known as mechanics’ liens (for unpaid construction or renovation bills)
- Creditor lines (for instance, an unpaid balance on a preexisting mortgage)
- Court judgments (for instance, a post-divorce judgment awarding part of the property to a former spouse)
Title insurance policies cover future costs arising from title disputes. For instance, the holder of a valid title insurance policy wouldn’t have to pay out-of-pocket to defend against a lawsuit brought by contractors claiming that their companies had liens on the property stemming from a previous owner’s unpaid renovation bill.
Lenders vs. Owners’ Policies
Lenders require borrowers to pay the cost of the title search and the policy that protects them. The cost if title search and lenders’ policy is roughly .5% of the cost of the home, but it can vary considerably, from under $1000 to $2500 or more based on the cost of the home, the state where it is located and the title company. The new “know before you owe” forms required by Consumer Finance Protection Bureau were designed to help consumers shop and save on closing costs like title insurance.
Title companies also provide policies that protect the interests of homeowners. Usually issued in the amount of the real estate purchase, owners’ policies provide protection against claims resulting from unpaid mortgages; unpaid property taxes; child support liens; missing heirs who could claim the property belongs to him or her and missed easements or rights of way that could limit your use of the property.
Owners’ policies are optional and are available to buyers to pay cash as well those who finance. Many title companies offer a significant discount when both the owner’s and loan policy are purchased simultaneously. That’s because title companies need to conduct only one search for both policies. On the East Coast, the buyer typically pays the cost of his owners’ policy. Sellers on the West Coast, normally pay the cost of the buyer’s ownership policy.
Pros and cons of Buying an Owner’s Policy
Buyers are required to pay for the lenders’ policy, which may be one of their larger closing costs, but any owners and buyers forgo the additional expense of an owners’ policy. For a buyer or seller facing moving and decorating expenses, cash can be tight. On the other hand, facing the many future years of ownership without title protection may not be a good idea.
Here are the pros and cons of buying an owner’s title policy
- Most title companies provide owners’ policies at a significant discount because the don’t have to conduct an additional search. They can use the same search performed for the lender to underwrite the owners’ policy.
- Whether a claim is legitimate or not, an owners’ policy provides protection and covers legal costs should someone sue and argue they have a claim against the home from before you purchased it.
- We live in a litigious society. An owners’ policy will protect you from events that occurred before you bought the property. These may include errors in recording deeds, surveying errors, or heir of a past owner who makes a claim against the title.
- While the value of lenders’ policies decline as the principal of the mortgage is paid off, owners’ policies remain in full effect for as long as they, or their heirs, own the property.
- Even with a discount, an owners’ policy could cost hundreds of dollars needed elsewhere.
- On a new home, the risk of a title dispute minimized because no one else has owned the new home the and the builder certainly made sure he had clear title before he invested millions in developing a community.
- At a later date when more cash is available, an owner can always get title insurance, though he will pay full freight for the search and title.
- The risk of having a claim against your title is relatively low.Title insurance companies pay out about 5 percent of the premiums their receive on claims, relatively low compared to other forms of insurance. The risk of a claim against your title is probably lower than a claim that would be paid by your car or home insurance.