Title insurance – everything you need to know

A title insurance policy is utilized both by home buyers as well as mortgage lenders to provide coverage against loses arising from a host of circumstances like undisclosed liens on the property, back taxes, fraud, forgeries, court judgments, and other financial and legal problems that can surface in relation to the purchase or refinance of a property.

How title insurance policies work

When a policy is purchased, the insurance company performs a search of all records of everything that would have an effect on the title. The search will examine records from county, municipal offices, clerk of courts, register of deeds, etc. Documents that will be reviewed are liens, judgments, tax records, sewer assessments, street easements, etc.

Because of a title search, early warnings are detected which need to be addressed prior to the sale of a property or before applying for a refinance.

The title search will show to the insurance company the insurability of the property's title. Based on this, the company will then issue the policy.  When problems arise during the time the policy is in effect, the insurance carrier will defend the insured title and shoulder the losses that are within the policy's coverage.

How a title insurance policy differs from other types of policies

There is substantial difference between this type of policy and the other types of policies. It provides emphasis on prevention of risk unlike in other types of insurance where the emphasis is on assuming the risk.

It is therefore important for a title company to put a lot of effort in doing research and performing corrective work. Anything that the title search might have missed could lead to claims and losses.

Another difference is the mode of payment - for other types of insurance payments can be done quarterly or monthly. For title policies, payment is only done one time. In mortgage transactions, it is done during mortgage closing.

General types of title insurance: homeowner's title policy and lender's policy

A lender's policy is a requirement when securing a home loan. It does not protect the one applying for the loan but rather it protects the interest of the lender.

A homeowner's policy, meanwhile, protects the owner against any losses in the event that there are challenges to the title of the property. 

Here are other important notes about both policies:

  • The lender's policy is, in many cases, one of the costliest items during mortgage closing.
  • In some states, the homeowner is required to buy both an owner's and a lender's policy.
  • In Florida and in certain states, the owner's policy is paid for by the seller of the home.
  • In some states, part of the price of an owner's title policy is shouldered by the lender.

Items covered in a standard policy

Standard owner's policy:

  • Errors in deeds or omissions
  • Errors in relation to examination of records
  • Undisclosed heirs
  • Forgery

Standard lender's policy:

  • Provides assurance that the individual(s) mortgaging the property are the real owners.
  • Provides assurance that the lender is the first position lien holder on the property.
  • Provides the lender a high amount of safety against the loss of the property because of a problem with its title.
  • The lender remains protected as long as the home loan is not fully repaid.

Items covered in extended title policies

Extended owner's policy:

  • Claims made by parties which are not found in public records
  • Problems related to easements (like right of way) or claims related thereto which are not found in public records
  • Problems related to boundaries or surveys
  • Liens that are not put on record and are in relation to material, labor, equipment or services.

The cost of title insurance on average

To give an idea on how much a lender's policy costs, Bankrate.com posted the average cost per state in 2010.

New York heads the list with $2,925, Texas came in next with $2,464, and Utah had it at $2,564. The lowest among all states was Arkansas with $1,011.

These figures already included the cost of title search services. Also, these were based on home mortgage of $200,000 with twenty percent down and with the borrower having a good credit score.

When to consider buying an owner's title insurance policy

There are many arguments supporting the purchase of this policy and these include the following:

  • What will happen to you when you do not have coverage and a claim is raised against the title? This means you have to rely on your own finances to defend against that claim.
  • Losing against a claim can mean losing ownership over the property.
  • In addition to losing the property, the consumer will also have to think about the loan he owes to the bank if there is a mortgage attached to the property.
  • The cost of a policy is small compared to the cost of defending and losing against any challenges raised against the property's title.

Tips on how to save when buying a title insurance policy

  • Contact your state's insurance department or consumer protection department for an idea on cases filed or complaints made against companies you are considering to buy from or have been recommended to you.
  • Work with insurers who have operations in your area as title insurance laws tend to be localized.
  • If the property you are buying was only in possession of the seller for a few years, ask the insurance carrier if they have a "Reissue Rate" which tends to be cheaper by as much as forty percent.
  • Opt for "Hold-Open" coverage. This is applicable to sellers who plan to be an owner of a property for a limited time as they will be putting it up for sale soon. Some insurers are willing to grant discounts for those who opt to purchase a "hold-open" policy.
  • Buying both a lender's and an owner's policy at the same time from the same insurer can get you discounts.
  • Negotiate for the seller to shoulder the cost of coverage.
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