Title insurance is one of the most important ways to protect your real estate investment, although deciding whether lender and owner policies are necessary can be challenging.
If you end up with a property with a defective title and don’t have title insurance, you risk losing the house and/or thousands of dollars, depending on the situation.
We’ve uncovered the truth about title insurance and answered the question, “What is title insurance?” We’re here to help you understand the difference between lender’s and owner’s policies.
What Is Title Insurance?
When you purchase a property, you become the owner of title. A title gives the property owner rights to the property, including the right to own, use, and sell the property as desired.
The chain of title refers to the owners of the property and is where defects can occur. For example, a property owner could be not satisfying a lien or illegally transferring the property, which could lead to financial loss.
Title insurance is an insurance policy that protects the insured against title defects causing financial loss. The title defects can include things like improper outstanding legal or financial issues or improper transferring of the property.
If a previous owner or creditor were to come forward and demand payment or resolution of the property ownership issues, title insurance could help with the financial cost of such issues, including court costs.
Title insurance covers any occurrences before you took ownership of the property that didn’t appear in the title search the title company did, which then provides the title insurance.
The title search should ensure the title is “clean” and the property can be transferred, as the title examiner researches all public documents regarding the property.
Do You Need Title Insurance?
Although lender’s title insurance is almost always required when you finance a property, an owner’s policy is optional.
A lender’s policy protects the lender’s interest in the property. A lender’s policy is for the loan amount and lasts for the duration of the loan. You can also purchase an owner’s policy, which is a one-time purchase and is equal to the sales price.
Title insurance protects you against financial claims that occurred before you took ownership. Property liens transfer with the property, not the person.
For example, if a property owner didn’t pay property taxes and it slipped through the title search, you’d be responsible for the back taxes as the new owner on record.
Benefits of having title insurance
Title insurance provides owners with many benefits, including:
- Financial protection while you or an heir owns the property.
- Protection from things you couldn’t prevent, such as fraud or forgery.
- Undetected easements that were not found in the title search.
- Unpaid liens, such as a mortgage, taxes, or mechanic’s lien.
Risks of not having title insurance
Without title insurance, all financial burden falls on you as the property owner. It could be something small, such as an unfound mechanic’s lien, or something as large as a past heir claiming ownership of the property.
Without title insurance, your property ownership could be at risk if someone tries to claim ownership, or the lien or financial claim against the property is so high that you cannot afford it.
Types of Title Insurance
There are two types of title insurance: owner’s and lender’s insurance. As discussed, owner’s title insurance is optional, and lender’s is almost always required.
Owner’s title insurance
Owner’s title insurance is for the full sales price, and the cost varies widely by state. Most title companies say to estimate $1,000 per policy, but again, this can vary widely by location.
You pay the owner’s title insurance premium once, at closing, and can negotiate to have the seller cover the cost in some situations. The policy lasts the entire time you or an heir owns the home, so you don’t have to renew it.
Since title searches aren’t without risk of error, it’s a good idea to purchase an owner’s title insurance policy for protection against the unknown.
Lender’s title insurance
Lender’s title insurance is required if you use financing to purchase the property. This type of title insurance is specific to your current lender and for the loan amount you borrow.
If you only have a lender’s title insurance policy and not an owner’s policy, any title defects that incur financial costs are your responsibility.
A lender’s title insurance policy expires if you refinance the mortgage or sell the property. If you retain the property and secure new financing, you must pay for a new lender’s policy, but not the owner’s, if you have one.
Choosing a Title Insurance Company
When choosing a title insurance company, there are several factors to consider.
Title insurance costs
Like any insurance policy, each title company charges different costs. Determine which company offers the best rates as one factor, while also considering their overall reputation and services offered. The company with the cheapest rates isn’t always the answer, but neither is the company with the highest rates.
Title companies do much more than provide title insurance in real estate transactions. Determine what services they’ll offer and, of course, the costs.
Ask for itemized details of all real estate transaction costs, including closing and holding escrow. You might find a company has low rates but charges more for all other services, or vice versa.
Reviews and ability to work locally
You must work with a title company licensed to operate in your state. First, determine which title companies can handle your transaction, and then read the reviews.
You can also discuss your choices with your real estate agent or mortgage lender, since they deal with them daily and may be able to point you in the right direction.
Title Insurance Claims and Coverage
Title insurance claims can help cover you financially when issues come up with property ownership or liens. Here’s what you must know to file a claim and get it covered.
When to file a title insurance claim
Title insurance claims are for defects against the title. For example, the previous owner didn’t pay their property taxes, and it got overlooked during the title search. Or there was contract work completed, and the owner didn’t pay the bill.
If someone files a claim against your property or tries to collect on a lien, you should file a title insurance claim.
What title insurance covers
Title insurance only covers claims against the property ownership. It covers financial losses you would incur as a result, including court or legal fees.
It only covers claims against the title from the date the title search was effective for and before you took ownership of the property, not any liens you incur as the owner of the record.
The claim process
Each title company has different requirements for filing a title insurance claim. Some allow phone calls or emails to inform the title company of the claim. Your title insurance company may also have a form you can complete online.
If your title insurance company requires you to complete the request in writing, be sure to send it via certified mail. This provides proof of submitting the claim. After filing a claim, the insurance company handles everything else, much like an auto or home insurance claim.
You provide the title company with all the necessary details, and they handle the rest. They may pay off the claim if they can work out a plan with the entity filing a claim or help you with the cost of representation in court.
Title Insurance vs. Homeowners Insurance
Title and home insurance differ vastly, yet you should consider both policies.
Home insurance policies cover perils that cause damage to the home’s structure, such as fire, storms, vandalism, or theft.
You may get coverage to repair or replace the home’s structure. As a landlord or property owner, you may also have liability coverage for things like vandalism and if your tenant or someone else sues you for damages they incur on the property.
Title and home insurance are required when you have mortgage financing, but all property owners should consider title and homeowners insurance to protect their investment.
The Role of Title Insurance in Real Estate Closings
When you purchase title insurance, either lender’s or owner’s policies, you’ll pay for them at the closing. They become a part of your closing costs, and you may negotiate the costs with the title company and seller to determine who will pay the costs.
Both premiums are a one-time cost that must be paid in full at the closing. Lender’s policies remain in effect as long as you have the mortgage, and an owner’s policy remains in effect as long as you own the home. You do not have to purchase another owner’s policy if you refinance.
As a real estate investor, having title insurance is the key to a profitable investment. If someone were to stake a claim or a lien on the property and you couldn’t afford the payoff, you could lose the home in foreclosure.
Title insurance protects you and the lender financially. It decreases your chances of losing the property due to a defective title and keeps more money in your pocket.
Having proper title insurance protects you and the lender financially. While it increases your cost to close on the property, it’s an investment in your future.
Figure the title insurance in with your total expenses to ensure the purchase makes sense, as title insurance isn’t something you should overlook.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.