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If you’re buying a new home, your mortgage lender will probably require you to purchase mortgage title insurance as part of your closing costs. You may be asking, “How does my house have a title? Is it a member of the royal family? Well, simply put: It’s not that kind of title.
Get ready to learn more about this often overlooked – but vitally important – closing cost.
Your Mortgage Title, Defined
A mortgage title won’t put you in line to anyone’s throne, but it will trace the chain of ownership on your property. A mortgage title is a record of a home’s previous owners and any claims to ownership on the property.
Why does it matter who owned the home or had a claim on it before you bought it? Well, if there’s a question about the home’s legitimate owner or title holder, that can cause problems for you or your lender before and after you’ve purchased the home.
Your lender will likely require you to purchase title insurance to protect you and your lender from problems and defects with the home’s title.
How Mortgage Title Insurance Works for You and Your Lender
When you apply for title insurance, the title insurance company (aka title insurer) you work with will perform a title search. This is a deep dive into the title to ensure that it’s clear. In other words, the title insurance company confirms that there are no unknown owners or claims on the property.
Once the title company completes its search, it will offer you a lender’s or owner’s policy (more about that below) based on the potential risks. If serious issues are uncovered, they may not sell you a policy.
When a title company sells you a policy, it means that they will compensate you or your lender if an unexpected problem with the title emerges in the future.
Lender’s Title Insurance vs. Owner’s Title Insurance
Mortgage title insurance usually comes in two varieties: lender’s title insurance and owner’s title insurance.
Lender’s title insurance
A lender’s title insurance policy is designed to protect the lender from liability for as long as they hold the mortgage on your home. Most lenders will require that you purchase lender’s title insurance as part of your closing costs. Your mortgage title insurance requirements will be clearly defined in your mortgage loan policy.
Owner’s title insurance
An owner’s title insurance policy protects the home buyer. If an unexpected title issue emerges after you buy the home, you have extra protection. Owner’s title insurance isn’t necessary, but it can be helpful.
What Does Title Insurance Cover?
Title insurance is designed to protect the buyer or lender from any issues with the home’s title. These issues can include questions of ownership, issues with local zoning laws or an existing lease on all or part of the property.
A lien is a legal claim against a property by a creditor. An “unknown lien” is a lien you weren’t aware of when you bought the property. Unknown liens can take many forms, including:
- Unpaid property taxes or homeowners association dues
- Outstanding child support payments
- Money owed to contractors who weren’t paid
If someone with a lien claims that you owe money, title insurance can help cover the costs to pay back these unknown liens, so you can own your home free and clear.
If the person currently selling you their home (or a previous seller) falsified or forged documentation or simply isn’t the rightful owner of the home, that could lead to big problems in the future if the legitimate owners come to claim their home.
Easements and encroachments
Sometimes title insurance can protect you if there are issues with other people or local entities using part of your new home’s property. For example:
- A neighbor placed part of a shed or garage on the property you plan to buy.
- A public path to a local park cuts across part of the property you plan to buy.
- Part of the property you plan to buy runs over a water main and the utility company will need occasional access to it.
These issues usually come in the form of easements and encroachments.
- Easements: Legal agreements with neighbors, local governments or utility companies that may (or may not) apply when you buy the property. These agreements should either be disclosed by the seller or should come up when the title search is performed.
- Encroachments: If no agreement exists, the problem may be an encroachment, which can lead to property rights disputes or liability issues. If there are financial issues related to encroachment, your title insurance may provide some coverage.
Maybe you want to buy a house that was owned by the seller’s parents or other relatives. They claim that they have the right to sell, but the title search reveals that another heir is entitled to a share of the home.
If the seller hasn’t settled with the other heir(s) or never came to an agreement to buy them out of their share, that can get in the way of you claiming ownership.
Errors in the public record
Every title transfer, lien, encroachment or easement needs to be recorded with the local authorities. But what if the staff at the county courthouse made a mistake with the paperwork?
Errors can range from missing or misspelled names to overlooking a lien or not recording an heir.
How To Shop for a Title Company
When you get your Loan Estimate form, there’s a section on the second page that breaks down your closing costs. It also details which closing services you can and can’t shop for.
Usually, you can shop for the title company. Your lender, real estate agent or even the seller may recommend a title company or provide you with a list of options. Of course, if you can find a better option, you don’t have to work with their recommendations.
If you’re not sure where to start, ask family and friends who are homeowners and do your own research. The goal is to find a company that has a good track record.
Pro tip: Ask the title company if they offer discounts, including discounts for first-time home buyers.
What Does Title Insurance Cost and Who Pays for It?
Whether it’s lender’s title insurance or owner’s title insurance, the home buyer usually pays for title insurance.
The policies are usually bought and paid for at closing. While rates can vary, depending on state and local real estate laws and the value of the home, policies can easily range from a couple of hundred dollars to a few thousand, averaging around $1,000 per policy.
Title Insurance: Final Thoughts
Like most insurance, you buy title insurance hoping you’ll never have to use it. While lender’s title insurance is required, owner’s title insurance isn’t required. However, problems may come up after the title search and an owner’s policy can protect your investment in the home.
Before deciding on an owner’s policy, consider the age and history of the home and whether the seller is the original owner, a recent buyer or an heir who may not be aware of the home’s history and any easements or encroachments.
If there are any questions about the property or its title, it’s probably best to pay for the extra insurance – and the extra peace of mind.
Realtor.com®. “What Is Title Insurance, and How Much Does Title Insurance Cost?” Retrieved December 2021 from https://www.realtor.com/advice/buy/how-much-does-title-insurance-cost/