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The Ins and Outs of Title Insurance

Monday, November 1, 2021

If you’re buying a home, you need to know about title insurance. Your first reaction to this statement might be, "oh no, not another insurance policy to shop for," but this policy could save your hard-earned investment.

Title insurance is an important part of the home-buying process that protects your investment in case there are any issues with the property's title. It also ensures that you can safely and legally transfer ownership of the property without delay or complication. 

Since title insurance can be confusing, we've put together a guide to the essential things you need to know about this type of insurance policy. You'll want to read it before you get too far into the home buying process.

Do I Really Need Title Insurance?

Before you have the keys to your new home in your hand, you'll make decisions about multiple types of insurance. A title insurance policy protects against specific problems associated with the ability to get a clear title to the home you're buying.

If you're not familiar with what these problems could be, consider this: imagine if someone showed up on the doorstep of your new home and claimed ownership. They could be an heir to the title of your home's previous owner, or they might even have legal documents to back up their claim.

If this happens before you've purchased title insurance, it can lead to problems with transferring ownership and using your new property. A title policy protects against these issues by ensuring that all parties involved in a real estate transaction are properly identified and that they have legal title to the property in question.

This is only one potential problem. We'll look at the others next.

Potential Title Defects Explained

Anything that adversely affects the value or use of a property is typically referred to as a title defect.

Past owners can create title defects by not completing certain documents properly or by failing to pay mortgages or liens on a property. Missing heirs and title fraud cause two other common title defects.

Let's talk a little more about each of these defects.

Property Liens

A property lien is a legal claim made by creditors against the title to your home. They can be placed on a title for a variety of reasons, most often because someone has not been paid back for goods or services provided to that person’s house or business during their ownership.

Missing Heirs and Unrecorded Wills

If the title to your property is still in the name of a deceased person, or you can't find someone who has title through inheritance, it could be considered an ownership defect.

Title Fraud and Forgery

This happens when people manipulate documents associated with title transfer by forging signatures on deeds, creating false wills that make them owners of real estate, or altering documents that change the title.

You don’t want any title defects on a home because they'll likely cause issues down the road. If you ever sell the property, the next buyer will expect a clear title. The title insurance policy you choose should be able to protect against any and all title defects so that there’s no risk of losing your home because the title is not clear or clean. 

Next, we'll address a couple of common misconceptions about title insurance policies.

My Lender is Providing Insurance

If you take out a loan to purchase your home, you will be required to get insurance but it’s not owner’s title insurance. It's the lender’s title insurance, and it only protects your mortgage company.

Instead of protecting the home buyer with an owner title policy, lenders require you to purchase a lender title policy at closing.

This policy protects your lender for the amount of the loan or mortgage. The policy is valid as long as there’s a loan on the property. Again, lender’s title insurance does not protect you, the buyer.

Another type of insurance often gets confused with an owner's title policy. Homeowner's insurance.

I Already Purchased Homeowner’s Insurance

Be careful not to confuse owner’s title insurance with homeowner’s insurance. Homeowner’s insurance covers things like damage from natural disasters, or injuries incurred if someone slips and falls on your property.

A homeowner’s policy may help offset the cost of a new roof, or replacement of carpet if the basement floods. Lenders require you to have a homeowner’s policy, but if you pay cash for your home, you do have a choice in the matter. Of course, a savvy homeowner makes sure they insure their home against damages.

You don’t want to be without homeowner's insurance, but it does nothing to ensure the property you're buying comes with a clear title.

Title Insurance May Not Be Mandatory

Title insurance protects you against title defects and the costs involved with repairing them, but it also ensures your legal ownership of your home so there's no question about who owns what.

Requiring this kind of insurance policy would seem to make sense, but it’s not always mandatory.

If you purchase a property with cash and don’t obtain financing, then you’re not required to purchase title insurance in most states. In the state of Pennsylvania, only buyers who don’t finance the home’s purchase are exempt.

If someone wants to contest title or otherwise challenge your claim of ownership, they must go through proper channels instead of trying to take advantage of any title defects. If you own title insurance, your insurer will stand against any challenge to title and take care of all legal costs to protect your investment.

While it may not be mandatory, it’s wise to budget for the cost of an owner’s policy when you estimate your closing costs.

Who Pays for the Insurance Policy?

Generally, the buyer bears the responsibility for covering the cost of the lender's policy and the homeowner's insurance policy. The buyer also usually pays for the title insurance policy.

There is a caveat. Sometimes real estate agents negotiate for the seller to pay all or a portion of the owner’s policy premium.

As far as cost, it all depends on the property value and location. The title company that issues the policy calculates the cost as a percentage of the purchase price. The buyer pays the premium at closing as part of the closing costs.

We Can Help With Your Policy

It's always a good idea to make sure you have the right title insurance coverage for your situation. This step could save you from some major headaches down the line if there is ever an issue with your property and it turns out that the seller didn't disclose all of their information on time or at all.

Contact Heartland Abstract today. Let the leading insurance company in Pennsylvania help you determine the best type of title insurance or you!

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