Purchasing a home is one of the most important feats in anyone’s life. During the process of obtaining the home, one has to go through several steps and one of those steps is obtaining the title. Obtaining a title is just a real-estate term of taking ownership of the property, to put it simply.
However, what if there are some problems with the sale? What if you can’t take full ownership because someone has a claim to the property you’re buying? What if there’s a debt tied to the property? All of these could cause problems and unplanned expenses.
To protect yourself from those kinds of situations and unpleasantries that come with it, you should consider title insurance. If you’re not familiar with it, we’re going to try and break it down and explain what title insurance is, why it is important and what you need to know about it.
What Is Title Insurance?
To put it simply, title insurance is a way for either buyer or seller, to protect themselves from potential financial losses caused by faulty titles or any errors regarding the ownership of the property at hand. Most of these policies cover the majority of the claims, such as – liens, back taxes, easements, encumbrances and so on.
As you can see, several different things can cause issues when purchasing a property. For instance, you could find out during the buying process that the seller has no legal right to sell the property or that they aren’t the sole titleholder. All of that and more could cause you to spend more than you initially planned, but luckily, title insurance has got you covered.
What Are Liens, Easements & Encumbrances?
We’ve named liens, easements and encumbrances as potential issues from which you would be protected by title insurance. However, as many aren’t familiar with what these actually are, we’ve decided to briefly go over each of them.
Liens are a form of security interest placed on the property. It’s usually placed by a contractor or a lender, who still have unsettled debts tied to the property. With insurance, you’re shielding yourself from having to ‘inherit’ previous owner’s debts.
Easements can also be problematic, as they mean that someone else has the right to freely use your property even though you are the legal owner. For instance, if you happen to have utility lines going through your property, a utility company has an easement, or the right to do work on those lines right from your backyard.
Encumbrances are virtually the mix of the previous two and commonly include additional restrictions.
Types Of Title Insurance
There are two different types of insurance – lender’s (loan policy) and owner’s title insurance.
Lender’s insurance is a policy that isn’t particularly useful to you as a buyer, as it protects the interests of the seller. However, it’s a policy you will have to buy if you’re taking out a mortgage. Like we’ve said, it’s there to make sure the mortgage company’s interests are covered and that they have the top claim to the property for as long as the debt isn’t paid off.
On the other hand, owner’s title insurance is the one we’re interested in, as this is the one that is protecting you – the buyer. According to SunnysideTitle, even in the case where you’ve done the title check and everything clears, you should consider getting the policy – just in case. It has been known for title problems to arise out of nowhere, so an insurance policy might not be such a bad deal. These policies are a one-time payment and they last as long as you or your heirs are the legal owners of the property.
How Much Does It Cost?
One of the things that we must cover is of course the cost of these policies. When buying a house, you’re already spending a significant amount of money and any additional costs aren’t welcome, to say the least – especially if you’re not quite certain you need them.
With that being said, an owner’s title insurance policy is an up-front fee that is determined by the purchase price of the home. In general, the policy will set you back somewhere from 0.5% to 1% of the property’s purchase price.
Now, depending on where you live, the policy price can vary. Sometimes the price is set by the state and is the same no matter which insurance agency you use and sometimes you can save a few hundred bucks just by searching for the best deal.
Who Pays For The Policy?
Now, this might shock you, but sometimes the buyer doesn’t have to pay for the owner’s or lender’s policy for that matter. In a lot of cases, it’s the unwritten rules of the local real estate that determine which party pays for the insurance. So, if you’re lucky enough to be living in a place where the insurance costs are handled by the seller – good for you.
Additionally, in most instances, if you decide to buy an owner’s policy, you could save a few bucks if you decide to pay both owner’s and lender’s at the same time.
Is It A Requirement?
As we’ve already said – the lender’s title insurance is a requirement. On the other hand, the owner’s policy is optional and the question here is – do you really need it?
Well, we can’t say for sure whether you do or you don’t, but we’d certainly recommend going for it if you have the means to do it. The fact of the matter is, no matter how extensive and detailed the title check is, overlooks happen. A problem could arise at any point in time and if you’re not covered – you could end up in financial or legal trouble. So, is it a requirement? No. Do you absolutely need it? Well, you don’t need it, but you probably should have it.
One of the main ‘problems’ of title insurance policies is the moment where we reflect back and feel like we’ve wasted our money because the problem never happened. Unlike life insurance policies, you’re not getting your money back after a certain amount of years. Essentially, what you’re paying for here is a piece of mind and protection in case something unexpected happens and sometimes that’s more than enough.