Do You Need Title Insurance To Buy a Home?

Title insurance protects a homebuyer and lender against post-sale claims against their title. In any real estate transaction, the buyer gets an owner’s title insurance policy and a lender’s title insurance policy for the lender.

This article explores why title insurance is essential when buying a home. If a title issue or insurance dispute arises during or after your purchase, a real estate lawyer can be a helpful advocate for you.

What Is a Title and Why Does It Matter?

The word “title,” in real estate, refers to ownership of real property. For example, consider automobile purchases. When a person purchases an automobile, the title transfers to them, the buyer. This means they have the title to the car. They own the vehicle. Similarly, in real estate transactions, the title transfers to the new homeowner, denoting legal ownership of the home.

The title to a house is not the same as the deed to a house. While a title confers ownership, a deed denotes a property owner’s right to claim ownership.

Title Searches Are Usually Required

Before purchasing a new home, homebuyers should get a title report on their prospective home. Many mortgage lenders require borrowers to get a title report. If the borrower defaults, the mortgage company can foreclose on the house and sell it to satisfy the loan. A clean title report ensures for the mortgage lender that there are no possible obstacles to a potential future sale.

Anyone can complete a title search independently because it is a public record. Yet, using a title company is preferable. Title companies execute title searches by examining public records.

A public record search should reveal the history of property ownership. A title agent or real estate attorney will conduct the title search and produce a title report. The title report summarizes the results of a title search and identifies any title issues.

Unexpected Title Issues

Even if a title search reveals no defects or encumbrances, it may not tell the whole story. New homeowners might only discover the issue months or years after the closing. 

Encumbrances include some of the following items:

• Liens
• Encroachments
• Past ownership
• Undisclosed easements
• Restrictive covenants
• Assessments for property taxes

Often, these types of encumbrances are not revealed through a public records search. Consider, for example, real property ownership through adverse possession. If someone openly uses land that is not theirs, exclusively over a specific time period, they may have ownership rights to that property. Their rights may trump the new owner’s, leading to a defect in the property’s title.

What Is Title Insurance?

Title insurance offers financial protection for defects found after the issuance of the title report. Title insurance policies will remedy these defects. For example, consider easements. An easement occurs when a property owner gives another party a right to use their property. Property owners often give local governments access to their property to install electric poles. This right-of-way is an easement.

Title insurance covers homeowners in these scenarios. The title insurance provider will defend against any adverse claims to ownership.

How Do I Get Title Insurance?

Getting a title search and title insurance policy is part of any real estate purchase process, including refinancing. Borrowers typically purchase an owner’s title policy and a lender’s policy.

Borrowers go through an escrow agent or a closing agent to buy a title insurance policy. Many buyers get insurance from the same title company that conducted the title search.

Types of Title Insurance

There are two main types of title insurance offered by title insurance companies. They are an owner’s policy and a lender’s policy.

Owner’s Policy

The lender’s policy does not cover equity in the property. As the homeowner pays off the mortgage loan, their exposure increases unless they have an owner’s policy.

While an owner’s title insurance policy isn’t mandatory, getting one is advisable. Policies typically cover the purchase price of the home. This policy offers financial protection for undisclosed title defects. It covers the value of the property at the time the property is purchased.

Lender’s Policy

Lenders often require a borrower to get a lender’s policy on the home. The lender will likely require that the borrower obtain a lender’s policy because the property serves as collateral for the loan. Any defect in the title of the property affects the value of the lender’s security, potentially leading to significant financial loss.

The loan policy only covers the amount of the loan. As the buyer pays back the loan, the value of the lender’s policy decreases.

Title insurance is distinct from private mortgage insurance (PMI). Both types of policies offer different protections to lenders.

Title Insurance Premiums

Homeowners who buy title insurance pay a one-time premium or a one-time fee during escrow. This fee is usually less than one percent of the home price. That percentage translates to a few thousand dollars for an average home purchase.

Closing costs typically include title insurance premiums. The buyer or seller may pay this expense depending on the state and negotiated terms of the sale. 

Discovering Post-Closing Title Problems

Title searches may uncover title problems. A few of these problems include the following title defects:

• Incorrect names in deeds, wills, or trusts
• Outstanding mortgages
• Judgments, tax liens, or easements
• Incorrect notary acknowledgments

These problems are often exclusions to the policy if they are not cleared before the purchase. The title insurance company will not protect homeowners from claims or lawsuits based on these exclusions.

Get Help for Title Issues 

If you have questions about your ownership of the property, consider speaking to an experienced local real estate attorney. They can help you sort through many title issues. They can also represent you in a dispute against an insurance company.