Title insurance is one of the least known parts of the homebuying process. The average person doesn’t know what it is, why they are paying for it, and what they should look out for. In this article we’re going to give you our definition of title insurance and some things you should know.
What is title insurance?
Title insurance is a policy that you purchase at the time of settlement when you are buying a property in the United States. It protects the purchaser of the property against any claims against their ownership interest in the future AND any potential liens/judgments that the previous owner may have been responsible for. The best way to explain this is through an example:
You see a vacant lot that was listed For Sale By Owner (FSBO) and decide to purchase it directly from the owner for $20,000. You schedule an appointment and meet the owner at the property. He’s owned it for 20 years, has no mortgage on it, and seems like a great guy so you decide to move forward and schedule a settlement date. The owner deeds you the property, you give him a cashier’s check for $20,000, and the property is now legally yours.
Two years later the area is booming and your lot is now worth $80,000. You list it for sale, get a full price offer, and the next buyer performs a title search (the first step in getting a title insurance policy). The search reveals that the previous owner owes $25,000 in back child support payments and was already years behind back when he sold you his lot.
Guess what? You now have to pay his $25,000 in child support payments if you want to sell your lot.
That’s why you shouldn’t buy a property without title insurance. Any mortgages, utility liens, judgments, child support obligations, etc. must be cleared when a property settles and it’s the title company’s job to find all that and more during a title search and make sure everything is satisfied the day that you settle.
If anything is missed and left unsettled (for example, a judgment against an owner) and you purchased a title policy, it is the title company’s responsibility. Did a water bill for $1,000 come in the mail two weeks after settlement? Someone called out of the blue saying they had a private mortgage against your property years before you owned it and they were never paid off? Repeat after me – “Please call my title insurance company and they will handle it.”
Here are some other things you need to know about title insurance in no particular order:
- We generally recommend that you always buy an enhanced policy, not a standard one. The enhanced policy covers things that the title company was not aware of before settlement, such as a contractor’s lien– and it doesn’t cost much more than a standard one.
- The cost for title insurance is mandated by the state but each title company has its own fees and charges that are on top of this cost. Some are reasonable and some are not. Your agent should know which ones you should pay.
- All title companies are NOT created equal even though the base cost is the same. Some title companies miss items more frequently than others, and not every mistake is a simple fix. Your real estate agent will likely have recommendations for title companies they have worked successfully with in the past.
- If you’re buying a property with a mortgage, you get a policy and the lender gets a policy (yes, it does cost more). If you’re buying with cash, it’s just one policy.
- Each lender has their own endorsements that they require. Endorsements are extra coverages that can be added to the policy. For example, if you’re buying a vacant lot you may want to have the endorsement that covers mistakes in the legal description. It’s very important to have someone on your side who knows whether you should or shouldn’t ask for certain ones.
- A good title company will explain to you the different ways that you can take ownership prior to your closing date. If you’re ever confused about the details of different ownership types, it’s always worth the few hundred dollars cost to speak to an attorney about it.
There is much more to know about the in’s and out’s of the title transfer and title insurance process but those are the basics that will get you started. Make sure you have a great title company on your side when you’re buying a property…or else! Happy hunting.
Rodney Ross
May 11, 2022