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How and What House Title Insurance Protects You From

Monday, July 11, 2022

The title insurance industry paid over $132 million in claims during Q1 of 2021 alone. 

So if you're in the process of buying a home, you'll want to factor in house title insurance to your closing costs. Without it, you could be stuck paying the costly damages to rectify a defective title. 

This article will discuss what title insurance protects you from in the homebuying process. Keep reading as we dive in.

What Is Title Insurance?

The title of a home represents the owner's legal rights to the property. Thus, you must ensure the title is clear and free from liens or other ownership claims when purchasing a property. 

If you don't, you'll be responsible for remedying any title issues yourself. 

However, home title insurance protects mortgage lenders and homebuyers from potential title problems after the title is transferred. Most insurance policies cover all common title claims such as back taxes and conflicting wills.

There are two types of title insurance: one for lenders and one for owners.

Lender's Title Insurance

If you're taking out a mortgage on a property, your lender will require you to purchase lender's title insurance. Even though the home buyer pays for the insurance, it protects the lender if the seller cannot legally transfer title rights.

Should there be a problem with the property, the lender has the first claim on the property above any other liens.

Usually, you will need to have a policy that covers the entire mortgage amount. 

Should there come a time when you want to refinance your mortgage, you'll need to buy a new lender's title insurance policy. However, since you will have less to pay on your mortgage, you'll get a cheaper rate.

If you pay cash for your new home, you will not need to get lender's title insurance since you don't have a lender.

Owner's Title Insurance

You'll also need to purchase owner's title insurance to protect yourself from title problems. This insurance is optional, but experts highly recommend it. 

A title can be defective even if nothing comes up in a public records search. Sometimes, doing your due diligence isn't enough to identify a title problem.

By purchasing an owner's title insurance policy, you ensure you also receive protection in the event of a title issue at any point during your ownership of the property.

For example, if an unknown heir to the property claims ownership five years after you buy the house, your title insurance policy will still be effective and help you settle the dispute. 

Often, filing specific legal paperwork is enough to clear up a title defect. But in this example, you'll need to pay to remove the heir from making a claim on the property. Naturally, you wouldn't want that payment coming out of your wallet. 

Plus, your title insurance will help cover the costs of hiring a real estate attorney to help you properly handle the defect.

Common Title Defects Covered by Title Insurance

Unfortunately, a property can have a defective title for years before becoming apparent. Most don't pay attention to a property's title until it's for sale.  

There are many examples of a defective title. The most common examples include:

  • Boundary disputes and easements
  • Liens
  • An unpaid mortgage
  • Conflicting ownership claims 
  • Judgments against the present or previous owners
  • Judgments against the buyer 
  • Filing errors
  • Clerical errors and omissions
  • Fraud or forgery 

It's more common for older properties that have had several owners to have a title defect than newer properties. 

How Does Title Insurance Work?

Obtaining title insurance takes two steps. First, the title company will perform a title search, which shows whether the title is clear or not. A clear title means the selling party owns the property and has the right to sell it. 

Often, the title company will identify title defects during its search. After conducting the investigation, the title company will offer you a quote for a title insurance policy based on the risks. 

If the property has several title defects, the company could decline to offer you a policy. 

How Much Is Title Insurance?

Lender's title insurance is a one-time premium payment often included in your closing costs. The average is between 0.5-1% of the home's value. However, prices vary by state. 

Since owner's title insurance is a separate policy, you must pay another fee. Most owner's policies cost a few hundred dollars. This is also a one-time payment. 

Where to Buy Title Insurance?

When you begin closing on a home, your real estate agent may recommend a title company to work with. Your lender may also have recommendations. 

But you do not have to take their suggestions. Instead, you can shop around for the title company of your choosing. You'll find the best rate for the most coverage by exploring your options. 

Some title companies offer discounts for first-time homebuyers, and often, if you buy lender's and owner's title insurance from the same company, you'll also receive a discount. 

Always ask prospective companies about discounts and if they've had any claims in the past. You want to know how each company handled past claims before selecting one.

Is Title Insurance Worth it?

Experts agree that owner's title insurance is a good investment. Buying a home is often the most expensive purchase someone will ever make in their life, so ensuring that purchase for another few hundred dollars is a deal. 

Should a title defect arise at any point while you own the property, you will have coverage and the resources to deal with the problem. Title defects are expensive to rectify, so title insurance provides peace of mind to homeowners. 

House Title Insurance in Pennsylvania

Now that you know how house title insurance protects you, you can see it's a necessary investment when buying a home. 

For home buyers in Pennsylvania, Heartland Abstract is a leading title company in PA. Contact us to learn more about our standard and enhanced title insurance policies. We work directly with home buyers to offer the best rates possible.

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