Home buying comes with a fair amount of uncertainty. From the appraisal to the inspection to the bidding process, there’s no telling when things will suddenly go sideways. When closing day finally rolls around, most people are grateful just to be done with it all.
Sadly, that uncertainty doesn’t necessarily end once you take possession of the house. Believe it or not, legal issues surrounding the ownership of the property can still arise even after you’ve signed the closing documents and moved into the residence. That may sound unfair, but it’s also a legally binding reality.
That’s where title insurance comes in. Here’s how this obscure type of coverage works, why it’s important to have and how to find the right policy.
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Title insurance protects a homeowner if they inadvertently buy a house that has issues with determining the legal owner of a property. Finding out who legally owns a property may sound simple, but issues can sometimes crop up to make matters a little more complicated.
One example is when there’s a lien against the property, meaning a third party has a legal right to receive part or all of the proceeds from a home sale. Some lien judgments come from the government, like if you didn’t pay property taxes or have unpaid child support.
If the previous owner didn’t pay their homeowners association dues, the HOA can use a lien to receive the late fees. When the home is sold, the lienholder should receive how much they’re owed and satisfy the lien.
There may be a surviving heir who is legally entitled to the property if the previous homeowner died without a will. If the bank sells the house to someone else, the heir may show up later with a legal claim to the house.
When you’re getting ready to buy a house, the title company will conduct a title search to check for liens and other potential problems. Usually, the title company will catch mistakes before closing and rectify them so the sale can still go through.
Unfortunately, the title company sometimes fails to find a problem before the sale goes through. That’s where title insurance comes in. Title insurance protects the homeowner in case of a lien or legal heir that wasn’t discovered during the title search.
If you don’t have title insurance and a prior issue comes up, you could spend thousands on a lawyer to fight the claim. You may even be forced to sell the home. A title insurance policyholder can rely on the title company to cover those expenses.
There are two types of title insurance, an owner title policy protecting the home buyer and a lender title policy protecting the lender. A lender title policy is always mandatory with a mortgage, but if you buy a house in cash, you won’t have to buy a lender’s title insurance policy.
Title insurance usually costs between .05% and 1% of the loan for both an owner and lender policy. Some companies have different rates, so it may pay to shop around. A few states, such as Texas and Florida, regulate rates for title insurance. In these cases, the cost will be the same no matter which company you choose.
An owner title policy is optional, but most experts still recommend buying coverage. The cost is minimal compared to the risk of losing your house. Like any other type of insurance, you’re paying for peace of mind.
Title insurance is different from most types of insurance policies because you pay a one-time premium instead of a monthly or annual payment. This may be due with other closing costs or rolled into the mortgage.
If you refinance a mortgage, you have to buy a new lender’s title insurance policy, but you don’t have to buy a new owner title policy. The initial policy sticks with you for the entire time you live in the house.
Most people don’t think to research title companies, opting to go with whomever their real estate agent recommends. That won’t typically be a problem, but there are instances where it pays to dig a little deeper.
When selecting a title company, try to use a different one from the previous homeowner. If that company missed something the first time, it’s unlikely they’ll find it a few years later. Hiring a new company increases the chance that they’ll find something the previous company missed.
It’s never too late to buy title insurance, even if it’s been years since you bought the house. Just research local title companies and tell them your situation. You can also call a local real estate agent and ask for their title company recommendation.
It may seem pointless to take out a policy after you’ve been living in your home for years, but consider this – what’s the cost of an inexpensive insurance policy compared to spending thousands on lawyers’ fees or losing tens of thousands to a lien?
