A title is a legal document that espouses an individual’s right to ownership and possession of all items that can be recognized as being owned or belonging to a person or a thing. At a basic level, a title is a document that indicates recognition of ownership.
In real estate, there are typically two types of title Insurance: an owner's policy and a lender's policy. Read on to find out what each policy is for, who and what it covers, and who pays for title insurance.
What Is a Title Company?
Title companies check for problems with the title by analyzing records, property maps, tax records and all sorts of other legal documents. Title insurers use this information for underwriting before they issue a policy.
Lender’s vs Homeowner’s Title Insurance
There are two types of title insurance: one that protects mortgage lenders and one that protects homeowners.
In both cases, title insurance protects homeowners and lenders against potential disputes regarding a home’s title. Some potential problems with property titles include:
- Undiscovered or missing heirs
- Liens for unpaid contractors or taxes
- Errors in past deeds or titles
- Property accessibility
In addition to traditional coverage, it’s also possible to purchase an extended policy that covers things that may not show up in published records.
Owner's Title Insurance
The owner's title insurance policy insures the homeowner against defects in the title that were not found during the title search. It is a one-time fee paid at closing and covers the owner or his heirs as long as they have an interest in the property.
This policy may be paid by either the buyer or seller, depending on what is traditionally done in that location.
Lender's Title Insurance
The lender’s title insurance policy (or "loan policy") protects the lender’s interests in the property should a problem with the title be uncovered. The lender's title insurance is paid for by the buyer.
Who Pays Title Insurance and What it Costs
There is no set rule that says who pays for what insurance and it can vary by state or county. For example, in Northern California the buyer usually pays for the title insurance, but in Southern California, the seller is expected to pay.
But there's no hard rule about who pays title insurance. Sometimes the buyer or seller will cover the fee entirely and sometimes both parties will split it. Ultimately, who pays what can be negotiated, along with other closing costs.
Both the lender’s title insurance and the homeowner’s title insurance carry a one-time premium that is typically 0.5%-1% of the purchase price of the home, although the price can vary by location.
A real estate agent will know who pays for title insurance in your area and can tell you how much it will cost. If you're looking for a great agent and you want to save thousands at closing, we recommend our friends at Clever Real Estate.
Clever is a nationwide brokerage that pre-negotiates low rates with top-performing, local agents who can help sell your house for a 1% fee (or $3,000 for home sales below $350,000). Traditional agents charge 2.5-3% — with Clever, you'll get the same full service of a traditional agent at a fraction of the cost.
Clever pre-vets and chooses its agents from brokerages like RE/MAX and Coldwell Banker. Clever will match you with several agents so you can hand-pick the one that will best represent your home sale.
Best of all, Clever is free! If you can't find an agent you love, there's no obligation to continue.
Why Title Insurance Is Important
After the title has been inspected, all parties involved can rest assured that the property records have been carefully researched and it’s safe to believe that the the home truly belonged to the seller before the sale. This research minimizes the risk of having problems later.
Without this process in place, title problems might be unknown to buyers, lenders and even sellers. Making an effort to discover any blemishes on the record before closing helps protect everyone from people or companies who make a claim that could cause problems long after the sale has closed.
It’s fair to say that having title insurance doesn’t provide a 100% guarantee against future problems, but it will it least allow your buyer and your lender to deal with any issues that arise with minimal risk and expense.
What Happens if a Problem Is Found?
Title problems don’t mean that sellers tried to commit fraud, and the underwriting process actually helps protect sellers from legal issues that may crop up later too. For example, sellers may enter a transaction in good faith only to later find out they do not, in fact, own 100% of the interest in the property. It’s also possible that they aren’t exactly aware of their property lines and rights.
This could happen when a property is inherited and the original owners aren’t around to supply additional information. It could also happen if the sellers or even previous owners purchased the real estate with some sort of an informal arrangement or at a time when local real estate laws were different.
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