Shopping for a home means coming to understand a world of legalities designed to help protect the process of property transactions in the United States. That means learning about the various stages of investigation needed to transfer ownership with confidence. Home inspections, appraisals, title searches, and other steps inform buyers and sellers of possible complications with the sale. When it comes to navigating these requirements, homeowners need to understand their obligations and the mechanisms built to protect them, such as owner’s title insurance.
Title Insurance Basics
Before discussing the difference between owner’s and lender’s title insurance, it helps to understand the basic facts about how this kind of insurance works, what it protects against, and how to find someone to provide it. Title insurance is itself a simple concept with a long history. It exists in many countries, although outside the United States it is not a standard part of every real estate sale. In the U.S., lender’s insurance is a legal requirement of a sale, and only owner’s insurance is optional.
The reason many other countries use title insurance more sparingly than the U.S. comes down to a difference in the way deeds are recorded. In the U.S., the registrar of deeds in most states does not guarantee an indefeasible title. In other countries, title insurance typically comes into play when an American financial institution is funding the project or when it is an American company buying property abroad.
Title Insurance Requirements
The requirements of coverage protections for title insurance are mostly similar from state to state, with small variances. There are a variety of ways to check on the requirements for coverage in a given state, but the simplest usually involves consulting the state government’s page for the topic. There, the required coverage is spelled out, and one can confirm that the coverage conforms with the law. In every state, parties to the transaction will be required to purchase a lender’s policy when receiving financing for the purchase of the property.
Owner’s Title Insurance vs. Lender’s Title Insurance
Owner’s title insurance protects the owner from claims against the title that predate the purchase of the property, and lender’s title insurance protects the lender. That is the primary difference between the two. In many cases, the coverage provided will be identical, and that is due mostly to the basic kinds of issues this insurance covers being standard, and including the following:
- Debt claims against the property
- Contractors’ claims for the cost of work to improve the property
- Unknown co-owners or heirs
- Tax liens
Some owner’s policies include options for additional coverage for a variety of circumstances. This additional coverage comes at a cost, but if there is a significant risk involved in purchasing the property for whatever reason, it might be worthwhile to upgrade the coverage. The cost of the lender’s insurance will be listed in the transaction paperwork.
How Should Buyers Approach Title Insurance?
Even after accepting the wisdom of the purchase and deciding to go forward, buying insurance for a title can be a little daunting because there’s not a lot of marketing toward consumers to provide them with background information about the product. Here are a few things every buyer needs to know:
- Title insurance is often regulated, but not always. In a regulated market, prices tend to be very similar from provider to provider, and differences often revolve around the exact coverages offered. In an unregulated market, there could be as much as a 20 percent price difference between the most and least expensive provider.
- Typical coverage includes fraud, forgery, unknown or undisclosed heirs of previous owners, and spousal claims on the property. Coverage beyond those basics will require additional costs beyond the baseline estimate, but like other title insurance costs, they are a one-time fee.
- The party responsible for paying for the insurance policy varies from state to state. In some, the buyer must pay for both policies. In others, the seller pays for one or both. Buyers need to investigate this obligation for themselves, but most of the time, lenders will provide the information as part of the loan application and closing process.
- Buyers have the right to select the company for both lender’s and owner’s title insurance policies. If the seller is pushing a recommendation, buyers can choose it, but there are good reasons not to do so. It is likely a good-faith recommendation, but if it is the same company the current owner used, the title search method is likely to be identical – with identical blind spots, if there are any.
What Are the Consequences of Forgoing Insurance?
There are things that can go wrong in a real estate transaction because there are many ways the previous owner might wind up with claims on the property. Between using it as an asset to secure financing, costs for improvements and repairs, co-owners and others who might have a claim, and unforeseen tax liabilities, there are a few ways that a property that does not have a clear title might be lost. Without insurance for the owner, the lender’s debt will be insured, but the buyer’s out of pocket costs for any improvements and for the purchase and maintenance of the house will be lost.
Things to Consider When Choosing Insurance
Owner’s title insurance policies provide help when any issues arise from the property’s title changing hands, even if they do not arise immediately. One can expect any major title insurance company to step in and provide help if a challenge to the sale’s validity arises or if a claim is against a portion of the home’s value. In that respect, any of the nation’s five major title insurance firms will offer robust coverage.
Where the differences matter most are in the preliminary title search and due diligence before the purchase. The law resource NOLO notes that finding the best, most robust choice for a title search can avert many problems down the road because a robust title search is more likely to turn up problems in time for the seller to clear them up before the sale. These preliminary reports are designed for just that purpose, and they provide a lot of peace of mind to lenders and buyers alike.
Should I Get Title Insurance?
Title insurance is a one-time cost, and it provides peace of mind for the duration of one’s ownership of a property. While the chances of a problem with the title arising after closing might seem small, the consequences may be too great to ignore. Please give serious consideration as to whether or not to buy owner’s title insurance.