Primary mortgage insurance, homeowner’s insurance and now title insurance? You may be thinking to yourself, that’s a lot of insurance! Is all this really necessary? It is and it all serves a very special purpose in your home buying process.
What is title insurance?
If you’ve been digging (pun intended) around our site, you may have already read up on primary mortgage insurance and homeowner’s insurance. Now it’s time to help answer the question, what is title insurance? Title insurance is protection against title “defects”. Simply put, when you buy a house you – and the lender who is putting up a big portion of the money – want to be assured that the seller has a clear right (without defect) to sell the property to you.
What is “Title?”
But before we jump into different types of title insurance, let’s define what a title is. Just like when you buy a car, a title indicates that you are the legal owner of the property. If you don’t have clear title, you may not own your home free and clear, which is a big concern if you’re living there and making substantial payments month after month!
What is a Deed?
You may also wonder what the difference is between a title and a deed. A deed is a set of legal documents that transfer the title from the seller to you. A deed is recorded and requires signatures from the seller and the buyer. Think of it this way – the title is what gives you rights to the property, the deed is the physical record that proves it.
On your closing statement, you’ll likely see a cost for deed transfer. You may think it’s just another cost lumped into the long list of fees but it’s actually important to show that the property was legally transferred to you.
Types of Title Insurance
As if all these details weren’t complicated enough, we should point out that there are two primary types of title insurance. Owner’s title insurance and lender’s title insurance.
Lender’s Title Insurance
Lender’s title insurance is typically required if you’re using a loan to buy your home. The bank wants to insure their interest in the property and protect the amount of money they have loaned you. For example, if you lose the home because there is a defect with the title, they want to cover their loss. In a case where you may no longer have the right (or title) to the property you thought you had, not only are you losing your home, the bank is losing its collateral.
Owner’s Title Insurance
An owner’s policy is for you as the new owner. It protects against title defects which can come in a number of forms. For example, let’s say that you’re buying a home from a couple that inherited the house ten years ago from a parent. They have no idea that there was another sibling who may have a right to the property and so they sell it to you and you start a life there. If that sibling shows up a year or two later claiming a right in the property, you could be in trouble.
Another example is a lien. Perhaps the seller left the property without paying a significantly large water bill. They weren’t living there anymore so they didn’t plan to pay the utility bill before selling their home. In fact, they never even looked at it and they certainly hadn’t noticed that it was over $500 when they sold the house to you. Unfortunately, when you go to open an account with the water company, you could find out that amount is now due. In some circumstances, that bill may become a lien on your new home.
The good news is that a title search, which you will have completed before you close, typically catches most problems. For that reason, you’ll have the opportunity to clean up any potential problems before signing on the dotted line. But, there are things that can slip through the cracks and you don’t want to find out about them after the fact. It’s often worth it (and may be required by your lender) to get both types of policies – lender and owner – to protect their interest and yours.
Construction Loan Policy (Less Common)
There’s another, less common form of title insurance we should mention – a construction loan policy. When construction is being done on a home, like when it’s being built, the contractor will likely have this type of insurance. That’s simply to protect against contractors who have the right to file a lien against the property.
Here’s an example. Let’s say a general contractor has been paid a certain amount and is supposed to pay his sub-contractors using that money. Whether or not he does, the subcontractors could lien the property indicating they didn’t get paid. It can create a big headache not only for the general contractor but also for the homeowner.
Although it may seem like a hassle, title insurance – in all of its forms – offers protection that is needed. Prior to the mid-1800s, no protection existed for a new buyer. You can imagine how many problems were occurring when a new buyer found out the property they had just purchased wasn’t really theirs! Title insurance became the solution.
Title insurance protects against past events, not future
With all the different insurances, title insurance stands out as a little bit different. And that’s because it is protecting against past events, rather than future. Think about it, with car insurance, you are protecting against an accident that may occur in the future. The same is true of health insurance. You aren’t protecting yourself against what has happened, but what may happen down the road! Even insurance in the real estate arena operates this way. Primary mortgage insurance is protecting against your future inability to make your payments and homeowner’s insurance protects against things like a fire or flood. This makes title insurance very unique and worthwhile because you really can’t control what may have already happened!
How must does title insurance cost?
So, just how much will you be paying for this wonderful insurance? As you might have guessed, it’s not the cheapest cost of buying a home. But the good news is that it is a one-time payment that protects you for the entire time you own the property. You, in most cases, will pay for title insurance during your closing process. No monthly payments and no worrying about increases over the years. There are circumstances in which you may not have to pay for the insurance depending on factors like your state and lender but plan to absorb at least some of the cost, if not all.
Typically, the title insurance is comparable across companies because it is regulated. The cost will depend on the size of your home, where you live, etc. It’s safe to assume you will need to save roughly $1,000 per policy but that’s a very rough estimate since there are many factors that will go into your policy. Start working early with your team of professionals – the title company and realtor – to get a quote for your situation. They will be able to help you get a reasonable idea of actual cost, as well as clarify whether or not you will be footing the entire bill!
Ask your lender if you have questions
If there’s any confusion during the process, and you are being told different things from your team, lean towards the lender’s position. This is because the lender is really the only one in the situation that shares your exact interest. They definitely don’t want to have something show up later that shows you can’t own the home, and neither do you! What they suggest in this case – may be what you should follow.
During your home buying process, a lot of different steps will be occurring. You’ll be involved in some, like the approval process where you’ll need to provide a lot of your financial and personal details. But you won’t be involved in others – like the appraisal process where the agent will be working with the seller. Title insurance doesn’t require much from you. Your closing agent will initiate the policy soon after you sign your purchase agreement. There are only a few major title insurance underwriters that exist so your agent will typically even select one for you.
When do I pay for title insurance?
Regardless of who is paying for the policies, the cost will be taken care of during closing. This is when all of the money is changing hands and typically occurs within a day or two of you signing your paperwork as the buyer – if you sign prior to the seller. If everyone signs on the same day, this all happens then too.
When you get to know Digs, you’ll notice that we like to help you get prepared – for all the challenges and costs of buying your first home. First, we want you to be educated on all things home buying – which helps you stay in control and get the best deals. And second, we want you to be ready financially to make a move when you find your dream home. One of the ways we do that is by helping you start saving early for things like title insurance.
We’ve developed the perfect tools to make saving easy and get you on the road to buying your first home! Get started here.