Understanding the fundamentals of title insurance and why it’s important for a home purchase is a piece of the “American Dream” pie that most home buyers are unfamiliar with. What is title insurance and what are its benefits?
First we should define what the title to a piece of property is. The title is the evidence that the owner is in lawful possession of the property. So, what is title insurance and how is different from other types of insurance policies? Unlike traditional insurance policies that protect the insured against future losses, title insurance protects the insured against claims against the home from before the homeowner purchased it such as liens, encumbrances or defects in the title.
There are two different types of title insurance. Most lenders require home buyers to purchase a lender’s policy. This policy insures the priority of the lender’s security interest in the property and protects the amount they lend. A home buyer has the option to purchase an owner’s policy to protect their investment in the property as well. If they elect to do so, the total cost will typically be lower if they use the same provider for both the lender’s policy and the owner’s policy.
How does title insurance benefit a home owner? More than likely, your home is your biggest investment, and title insurance protects your interest in that investment. Prior to closing, the title agent will perform an extensive title search of the property. This helps minimize the potential liability to the home owner by discovering any foreseeable issues with the title, prior to closing; but, once a home buyer takes possession of a property, an owner’s title insurance policy should protect them against any future claims. Common types of title insurance claims include, but are not limited to:
With traditional insurance policies, premiums are typically paid on a monthly basis. Title insurance carries a one-time premium which is paid at the close of the escrow. The cost of a policy will vary by state and is based on the purchase price of the home.