When you sit down at closing, you’ll see two title insurance line items on your cost sheet. The first one will say, “lender’s title insurance” and the second will say “homeowner’s title insurance.” This post will define what both types of title insurance are, will explain what they’re for and will explain who pays for what.
What is a Title:
According to Investopedia, A title is a legal document that espouses an individual’s right to ownership and possession of all items that can be recognized as being owned or belonging to a person or a thing. At a basic level, a title is a document that indicates recognition of ownership.
What Does a Title Company Do:
Title companies check for problems with the title by analyzing records, property maps, tax records and all sorts of other legal documents. Title insurers use this information for underwriting before they issue a policy.
What is Title Insurance: Lender’s and Homeowner’s
There are two types of title insurance; one that protects mortgage lenders and one that protects homeowners. In both cases, title insurance protects homeowners and lenders against potential disputes regarding a home’s title. Some potential problems with property titles include:
- Undiscovered or missing heirs
- Liens for unpaid contractors or taxes
- Errors in past deeds or titles
- Property accessibility
In addition to traditional coverage, it’s also possible to purchase an extended policy that covers things that may not show up in published records.
The Importance of Title Insurance
After the title has been inspected, all parties involved can rest assured that the property records have been carefully researched and it’s safe to believe that the the home truly belonged to the seller before the sale. This research minimizes the risk of having problems later.
Without this process in place, title problems might be unknown to buyers, lenders and even sellers. Making an effort to discover any blemishes on the record before closing helps protect everyone from people or companies who make a claim that could cause problems long after the sale has closed.
It’s fair to say that having title insurance doesn’t provide a 100% guarantee against future problems, but it will it least allow your buyer and your lender to deal with any issues that arise with minimal risk and expense.
Are Title Problems Always the Seller’s Fault?
Title problems don’t mean that sellers tried to commit fraud, and the underwriting process actually helps protect sellers from legal issues that may crop up later too. For example, sellers may enter a transaction in good faith only to later find out they do not, in fact, own 100% of the interest in the property. It’s also possible that they aren’t exactly aware of their property lines and rights.
This could happen when a property is inherited and the original owners aren’t around to supply additional information. It could also happen if the sellers or even previous owners purchased the real estate with some sort of an informal arrangement or at a time when local real estate laws were different.
Who Pays What and What Does it Cost:
There is no set rule that says who pays for what insurance, but it can vary by location and by the type of loan the buyer is taking out. Sometimes the buyer or seller will cover the fee entirely and sometimes both parties will split it. Ultimately, who pays what can be negotiated, along with other closing costs.
Both the lender’s title insurance and the homeowner’s title insurance carry a one-time premium that is typically calculated as 0.5%-1% of the purchase price of the home, though again – the price can vary by location.
Now you know what title insurance is, how it works and what it does!
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