Not surprisingly, home buyers are often unfamiliar with title insurance, which protects lenders and owners from claims against the "title" or ownership of real property. Some of that unfamiliarity concerns how this important type of insurance is bought and paid for.
Search is completed before title is insured
Title insurance companies issue title insurance after they complete a "title search," in which they research the history of the property's ownership to identify any “defects” or problems in the chain of title. Once that search is completed, an examiner reviews the findings and, if the examiner is satisfied, the insurance will be issued.
If the search turns up any problems, the issuance of title insurance may be delayed or denied. Common problems include outstanding tax liens or mortgages that presumably were paid off, but weren’t recorded as such. Few, if any, lenders will go forward with a borrower's financing if the title can't be insured.
In some states, title insurers issue a "commitment" while in other states they issue a "binder" or “preliminary” title report. "Prelims" are more common on the West Coast, while commitments and binders are more prevalent in other regions of the country. (The sale of title insurance in Iowa is prohibited by state law.)
Buyer or seller pays one-time premium
Title insurers typically handle both the search and the issuance of the lender’s and owner’s title policies. The premium is paid only once, when the policy is issued, not annually or monthly as is the case with other types of insurance.
When a home is sold, either the seller or buyer typically pays for the title insurance, or the seller and buyer may share the cost. Real estate customs and practices differ in different localities, and payment of closing costs is always subject to negotiation between the seller and buyer.
An owner's title policy usually can be bought along with a lender's policy for a relatively small additional cost. An owner's policy also can be purchased separately, though the cost typically would be higher.
New title insurance needed to refinance
Homeowners who refinance an existing mortgage typically must purchase a new lender's title policy even if the same lender originates the new loan. If the loan is refinanced within a few years, the insurer may discount the cost of the new policy since the search period will be relatively short.
Understanding the intricacies of title insurance may prove daunting for many home buyers, yet it's still smart to ask questions and make sure you understand any issues that impact your ownership of your home.
It's customary in most places for the insurer to send the title policy to the new homeowner by U.S. Mail after the transaction closes. Be sure to keep the policy in a safe and secure place with other important financial and legal documents.
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