If you borrow money to buy a home or property, a lending institution will probably make you buy a title insurance policy to protect its interest. As a consumer, it's in your best interest to be well-informed about title insurance, how it works, and what to look for in title insurance.
The U.S. Department of Housing and Urban Development is also a good source of additional information about title insurance.
Most first-time home buyers are familiar with many types of insurance (e.g., auto, life), but have no idea what title insurance is, and the role it plays in real estate transactions. In the rush to close such transactions as quickly as possible, title insurance is probably the last thing people are thinking about. Find out more here.
Title insurance helps provide home buyers and/or mortgage lenders protection against losses resulting from unknown defects in the title to your property that existed before the closing of a real estate transaction. Those unknown "deficits" could be:
Title insurance agents/companies search public records to develop and document the chain of ownership of a property. If any liens or encumbrances are found, the title company might require a home buyer to eliminate them before issuing a title policy. Title insurance agents might also hold money in escrow and perform closing services for an additional fee.
Title insurance policies are indemnity policies — typically, they protect against losses arising from events that occur before the date of the policy, which is the date of closing. This is different from other types of insurance policies, such as auto or life insurance, which protect against losses resulting from accidents or events that occur after the policy is issued. A title policy is usually paid for with a one-time premium that is handled at the closing of the real estate transaction.
Lenders — If a mortgage is obtained in order to purchase property, nearly all lenders require that a home buyer purchase the lender's title insurance policy for an amount equal to the loan. A lender's policy is issued to a mortgage lender. The policy gives the lender protection from covered losses arising from any defects in the title that have become known only after the insured property has been financed. The lender's insurance policy will remains in effect until the amount financed has been repaid, the property is resold or refinanced.
Owners — Either a home seller or home buyer may buy an owner's policy. In many areas, sellers pay for owner title policies as part of their obligation in the transfer of title to the home buyer. The question of who pays for the owner's policy can be negotiated as part of a purchase agreement.
An owner's policy is issued to a home buyer. It protects the buyer from covered losses arising from any unknown defects in the title that existed before the purchase which become known only after ownership of the property is acquired. Your owner's policy remains in effect as long as you own or maintain an ownership interest in the insured property.
Although home buyers are free to shop around for a title agent or a title insurer, many home buyers do not. Because buyers are unfamiliar with title insurance, they tend to let lenders and/or real estate professionals who are parties to the home buying transaction make that decision.
Conflicts of interest can occur if the entities making the decision have a financial interest in a title agency/title company. Section 8 of the federal Real Estate Settlement Procedures Act (RESPA) prohibits people involved in a real estate settlement process from giving or accepting kickbacks or referral fees.
Although a title insurance company will most likely be offered to you during the mortgage transaction process, you are not obligated to use it.
Frequently Asked Questions about Title Insurance.
Title insurance does not protect you against defects you caused or you had knowledge of prior to the date of the policy and didn’t disclose. It also does not protect you against exclusions or exceptions specifically listed in the insurance policy (e.g., recorded covenants and restrictions that may impact how you use the property). It also does not cover defects that arise after the date of your policy even if those defects do not rise through any fault of your own. Therefore, it is a good idea to discuss title insurance coverages with an attorney or your title insurer/title insurance agent before you close on your real estate purpose.
Title Insurance companies insurers and their agents) sell title insurance and provide related title and real estate services. These services may include the searching and examination of county real estate records; preparation and issuance of the title insurance commitment; assistance with the clearing of any outstanding real estate titles issues in preparation for the closing, and the scheduling and administering of the real estate closing for the parties to the transaction.
Title insurance policies are indemnity policies that protect against losses arising from events that occur before the date of the policy. This is different from other types of insurance policies, such as homeowner’s or auto insurance, which protect against losses resulting from accidents or events that occur after the policy is issued. Premium for title insurance policies is a one-time charge paid at closing.
There are two parts of title insurance policies: a Loan policy and an Owner’s policy. The lender will typically require a loan policy in an amount equal to the mortgage loan. It covers the lender’s interest in the property for the life of the loan. The loan policy protects only the lender and does not protect the buyer.
The buyer may purchase an owner’s policy to cover their ownership interest for the full value of the property. It protects the buyer from covered losses arising from defects in the title that existed at the time of the purchase. It covers the buyer’s ownership interest in the property for as long as the buyer or his or her heirs have an interest in the property or are liable under the “warranties” of title they may have made when the property was sold. Should someone challenge your title (e.g., your legal rights of ownership) based on an insured risk, the title insurer must defend that challenge and pay all associated costs and loss in property value that might result.
Under federal law, the Real Estate Settlement Procedures Act (RESPA), you have the choice to shop for your title insurance and title related services provider and no one can force you to buy title insurance from any particular company. Competing title insurers and their agents (sometimes referred to as title companies) may offer different services, title insurance rates, title service charges and settlement service/closing related charges; so shop and compare – The choice is yours!
As soon as you discover a title-related problem, contact the insurer listed on the policy itself. Make your claim in writing and include a copy of the policy and copies of all relevant documents including any correspondence related to the claim. It’s always a good idea to keep copies of your claim submission for your own receipts as well. The title insurer is required to promptly acknowledge receipt of your claim and is required to accept or deny your claim in a reasonable amount of time.