Blocks & Lots

Title Insurance: What is it exactly and how does it work?

What is title insurance?

Title insurance — it’s not sexy and not the first thought on a homeowner’s mind but if you don’t have it you could be heading for a whole heap of trouble.

A title insurance policy protects insureds against past and future losses. What does that mean? Unlike car or health insurance, title insurance is like a time machine because it can protect the insured against claims for past occurrences. If there was a dispute on your property dating back to before your or birth even the birth of the nation in the case of a historic property, a title insurance policy has you covered.

Who does it protect?

Both lenders and owners can be protected separately if they both have title insurance policies. A property owner, will of course want to protect their investment and a lender will require they do so. Equally, a lender can purchase title insurance to protect their interest in a property.

What type of protection does it offer?

When title insurance is purchased, an extensive title search of the property is conducted. This minimizes any potential liability by unearthing potential issues. Imagine digging up a home’s driveway and finding a dead body buried underneath. Title insurance clears the new owners of any liability. It doesn’t stop there, however. Once purchased, it will continue to defend against future litigation and any challenges to the validity of a new owner.

What’s the cost?

Like home insurance, the cost of title insurance can vary according to the type and price of a home and the state in which it’s located. However, unlike most home insurances, title insurance is paid in one lump sum as part of the closing. An average cost is around  $850 for a homeowner and $550 for a lender.

Is it really needed?

Put it this way you wouldn’t necessarily lose sleep worrying about the fact that you didn’t have title insurance. However, if you came to sell your house and realized you couldn’t because of a claim that could have been protected by a policy, you’ll rue the day you didn’t buy it. Title insurance generally only pays out to about 4-5% of insureds and the most common reasons are:

  1. Public records errors
  2. Liens
  3. Heirs omitted from title
  4. Fraud

Are there any reasons not to buy title insurance?

Some instances do occur when buying a policy doesn’t really make sense. For example, if a homeowner is refinancing their property and the deed and title are remaining unchanged, no new policy is needed if they are staying with the same lender. A new lender might request it.

Another instance is when an investor is flipping a property and doing a double close (ie purchasing in the morning and selling in the afternoon). If they have already conducted a title search before purchasing it, or putting it under contract it doesn’t make sense to buy a new policy. The new homeowner will buy it and would have already run title by the time of closing. Any issues would have already come to light.

Also, if you are buying a co-op, no need for title insurance. With single family homes, condos or townhouses – definitely!

What claims does title insurance cover specifically?

Clerical mistakes such inputting information to a public record are common reasons. In such instances a title examiner does some detective work and follows the chain of ownership of the house, seeing how the property was passed on from one owner to another — by sale, will or gift. He/she insures that there are no claims on the property, such as liens and mortgages, which will prohibit the title from being transferred.

Title insurance is not on the tip of most homeowners tongues when they think about buying or selling a property but without it their dream move may remain just that — a dream.

Jeff Vasishta