Some industries use a lot of exotic-sounding words and technical jargon. The real estate world takes a different approach. When you buy a home, you’ll encounter terms that seem familiar and fairly simple only to discover that they have industry-specific meanings. Title insurance is a perfect example. The average person knows what the individual words title and insurance mean, but what does the combination signify? What is title insurance? Why is it necessary? If you’re preparing to buy a house, here’s what you need to know.
What Is Title Insurance?
To understand what title insurance is, you first need a solid understanding of what a real estate professional means when they’re talking about taking title of a property. Many people believe that a deed and a title are the same, so they use the terms interchangeably. As Realtor.com explains, that’s a common mistake.
In truth, a deed is a legal document that is signed by the buyer and seller that conveys or confirms ownership of a property. A title, however, isn’t a document; it’s a concept. Title is a legal way of saying that you have ownership of a property and the rights and responsibilities that go with it. When you purchase a property, you are given the deed, a physical document that confirms that you have title to the property.
How Title Insurance Works
What is title insurance used for? Much like homeowners insurance offers protection if something goes wrong on your property, title insurance provides the policyholder with a shield from the fallout if any issues arise with the property’s title. As Investopedia indicates, a clear title is required for a real estate transaction, so title companies scour public records to verify ownership and determine if there are any claims, errors, or defects that could cloud the title. Since property records often date back to the early 1800s, issues aren’t uncommon. The issues identified before the sale can be dealt with before closing. However, if issues arise after the purchase is complete, they can cause legal and financial headaches for the new owners. That’s where title insurance comes into play. It shields the policyholder from financial losses stemming from a defect in the title.
Although they don’t often make the headlines, title troubles are surprisingly common. According to The Street, title insurance examiners turn up issues about 25 percent of the time. Fortunately, title insurance offers protections from a variety of title defects and disputes, including the following:
- Liens against the property
- Easements and right-of-way issues
- Unpaid back taxes
- Errors in the recording or filing of documents in the title records
- Forgeries or fraud in the title records
- Adverse ownership claims
The Two Types of Title Insurance
As you prepare for closing, the issue of title insurance will likely come up twice. That’s because there are two types of title insurance: lender’s title insurance and owner’s title insurance. As ValuePenguin points out, lender’s title insurance is a mandatory insurance policy that protects the interest of the lender in the event of a title defect. If you want to safeguard your own interests, you’ll need to purchase an optional owner’s title insurance policy. This is a separate policy, and while it’s not required, it can offer valuable peace of mind.
Paying for Title Insurance
Who pays for title insurance? As with most aspects of a real estate deal, this is negotiable. According to NerdWallet, both lender’s and owner’s title insurance policies are one-time, upfront costs. There’s no regular monthly premium payment to make. As part of your deal with the seller, you may be able to get them to pay for either or both of the policies. In many cases, the buyer pays for the lender’s policy while the seller pays for the owner’s policy as a good-faith gesture. If the seller is unwilling to do so, many buyers opt to buy their own policy rather than run the risk of skimping on this useful insurance.
At PrimeLending of Denver, we think buying a home should be exciting and rewarding. That’s why we’re committed to making the home loan process as easy and transparent as possible. How can we help you? To find out, contact us today.