Title insurance protects homeowners and lenders from financial loss due to defects in a property’s title that existed before its purchase. It safeguards against potential issues, such as liens, encumbrances, and other claims on a property’s ownership that may only become apparent after the purchase.
Main Risks Covered by Title Insurance
Title insurance defends you against past problems that may not have come to light during your purchase process. It can protect your ownership rights and financial investment in the property should one of the following issues come to light:
- Liens – claims on the property for unpaid debts that were the responsibility of the previous owner. These debts include mortgages, property taxes, and contractor bills.
- Encumbrances – restrictions on the use of the property, such as easements or rules imposed by homeowner’s associations.
- Title defects – errors in public records, forged documents, or undisclosed heirs or inheritors who may claim ownership.
- Legal challenges – disputes over property lines, boundary limitations, or conflicting claims from previous owners.
- Fraud and forgery – if a deed or other important document appears fraudulent, title insurance can help to cover losses.
How Title Insurance Works
Before issuing a policy, we conduct a thorough title search to uncover any issues pertaining to the property. We first notify the buyer and seller of any problems we identify and collaborate on a mutually favorable way forward for all parties involved. The seller is usually responsible for clearing these issues before proceeding with the selling process.
Once we deem the title clear, the buyer pays a one-time premium for the policy, usually during the closing phase.
There are two main types of coverage: a lender’s policy and an owner’s policy. A lender’s policy, which mortgage companies typically require, protects the lender’s financial interests. An owner’s policy is an optional, but recommended policy that protects the buyer’s investment in the property.
Lender’s Policy
This policy protects the lender against losses resulting from title defects that could impair their ability to foreclose on the property. A lender’s policy also protects the institution if it needs to recover the loan amount.
Coverage typically decreases as the mortgage amount drops, ultimately terminating once the loan is paid off.
Owner’s Policy
Protects the homeowner against title defects that could affect their ownership of the property.
Coverage generally remains at the original purchase price. Some policies offer an optional market value endorsement to expand the coverage as the property value increases.
Who Pays for Title Insurance?
Title insurance typically costs between 0.5% and 1% of the property’s purchase price when obtaining either a lender’s or an owner’s policy. The buyer usually pays for the lender’s mandatory policy when financing the purchase through a mortgage. Sometimes, the seller pays for the owner’s policy, often referred to as ‘seller pays’, and this is negotiated between the buyer and seller.
Who pays for title insurance can vary based on location and local custom. A seller may even offer to pay for the new owner’s title insurance policy as an incentive to potential buyers.
Enhanced Title Insurance – Do You Need It?
Enhanced policies offer broader coverage than standard policies, protecting homeowners against issues such as building violations, boundary disputes, and post-closing title defects. Whether you require enhanced insurance depends on factors such as the property’s age and history, your risk tolerance, and the value of your investment.
- High-value properties: When investing in a high-end home, broader coverage may be beneficial as the financial stakes are much higher. Significantly higher-valued properties require comprehensive coverage for financial security.
- Older homes: Often have a complex history due to renovations and additions, and benefit from enhanced security. Multiple prior sales, boundary challenges, or undisclosed easements pose higher risks of hiding potential title issues.
- Appreciating markets: A rapidly rising property value may benefit from the automatic inflation protection that enhanced policies provide.
- Zoning issues: If previous owners made improvements not compliant with local zoning laws, the new owner may be held liable. Enhanced title insurance may cover the cost of correcting or removing the violation.
- Extra security: An enhanced policy is a good choice if you want comprehensive protection, as it covers more than past title issues. A comprehensive policy protects owners against future problems that may become apparent after the purchase is made.
Enhanced coverage helps mitigate financial risk for buyers seeking long-term security. Additionally, it provides support for issues that typically fall outside standard policy terms.
Why Title Insurance Is Worth It
Title insurance helps protect you from problems with your property’s history that could cost you money later. You pay for it once when you buy your home, and it provides coverage for as long as you own it. If something does go wrong, title insurance can help cover legal costs or losses. It’s a simple way to avoid big surprises later. Cortes & Hay are here to make sure your property is safe, your rights are protected, and you can move forward.