Title insurance is a form of insurance that is designed to protect lenders and property owners from any potential hidden claims against a property. If, for example, you purchase a home and later someone contends the sale was invalid, title insurance protects against any possible resulting losses.
Two main types
There are two main types of title insurance. The first is the type that lenders require you to take out when you apply for a mortgage to protect themselves against any potential loss on the loan amount as a result of title issues. This insurance expires when the loan is paid off. The second is personal title insurance that is designed to protect you, the buyer, against any such losses. While optional, it is advisable as it protects your own investment interest. Personal title insurance remains in place the entire time you own a property.
Why it’s important
Whenever property is bought or sold a title search is conducted to ensure that the person making the sale is the legal owner. Occasionally, however, oversights can occur. Perhaps the owner has unpaid property taxes and the local county has put a lien on the property. Or maybe the property is co-owned by a seller’s ex-spouse and he or she neglects to have this person sign the deed transferring the title. In cases such as these, if a dispute occurs because a title search was faulty, title insurance covers the cost of settlement and any ensuing legal fees.
The cost of title insurance varies greatly depending upon where a property is located, its price and the extent of coverage. In some states, it may pay to shop around as title insurance premiums may vary between insurance companies. In others, however, rates are established by the state and may not be negotiable. The good news is that, unlike regular home insurance where you are charged an annual premium, you have to pay for it only once, at the time of closing. (The exception is if you refinance your mortgage. You will need to pay again for a new title insurance policy, although you may qualify for a cheaper “reissue rate.”)
Who pays for title insurance is open to negotiation. In a strong seller’s market, you can make your offer more desirable by offering to cover the cost. Conversely, in a strong buyer’s market, a seller may offer to pay for title insurance to sweeten the deal.