Understanding Title Insurance
When you buy a home, you “take title” to the property and establish legal ownership which is documented by recording your deed in the county’s public records. The objective of title insurance is to protect a buyer’s rights and interest in the property and to assure the property transfer is secure. In the event that there is an error in the process, the title insurance policy protects you from any financial exposure as a result of those errors.
Prior to issuing the title policy, the title company will obtain a title search which is needed to discover any liens against the property so they can satisfied prior to or at closing. Approximately 25 percent of all residential real estate transactions have issues with the title and in almost all cases get resolved prior to closing. The following are some examples of title issues:
- Unpaid liens for real estate taxes
- Mechanic liens from contractors who worked on the home but were never paid
- Judgments, state or federal taxes or business loans owed by the seller
- Mistakes in the legal description of the property or human error on previously recorded documents
- Paid mortgages that were not properly discharged
There are two types of title insurance:
Owners Policy: protects the buyer
Loan Policy: protects the lender.
An Owner’s Policy is typically issued in the amount of the real estate purchase price, and remains in effect for as long as the owner, or his or her heirs, retains an interest in the property. In addition to identifying risk before a transaction is completed, the Owner’s Policy will pay valid claims and all defense costs against attacks on the title.
A Loan Policy assures the lender of the validity, priority and enforceability of its lien (mortgage) – serving as protection for the lender’s security interest in the property. A Loan Policy is issued in the amount of the loan, and liability decreases as the mortgage debt is reduced. .
On a purchase the cost of the insurance is based on the purchase price and in most states the premiums are regulated. A general rule on purchase prices above $350,000 the cost is slightly more than ½ of 1% of the purchase price (example $500,000 purchase price title estimate is $2,600). Please speak with your attorney regarding the exact cost and ordering process.
Our only recommendation is that you order the title early on in the process to avoid any closing delays.