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What is Title Insurance?

By Arvin Sahakian · May 15, 2015 · Mortgage

What is Title Insurance?

Image courtesy of Flickr, Steve Wilson

Title insurance protects homeowner's from any defects and errors in title. Understanding title insurance is an important step for anyone considering purchasing a home or refinancing a home loan.

Buying a home is a dream come true for many homeowners. However, there is always the potential for things to go wrong when the home you are buying has a title that is not 100% clear. A clear title simply means there are no liens, claims or errors when recording the ownership of the property.

While the law requires that a seller and their real estate agent do everything in their power to assure a clear title or disclose any issues on title, sometimes issues can slip through the cracks.

Fortunately, there is a way to protect yourself. This protection is called title insurance. Learn more about this service and discover why you should consider it when purchasing a home and why many lenders will require it.

Title Insurance Defined

Title insurance is a policy issued by a Title Company that will guarantee a homeowner has a properly recorded ownership to the property. It also insures against any errors in the title that were recorded previously. The cost of the policy is based on the value of the property and typically paid by the buyer, seller, or split between both parties. In a refinance of an existing loan, the title insurance costs are paid by the borrower of the loan.

Two Types of Title Insurance

There are two distinct types of title insurance, and each fulfills a different role. Understanding the difference is important.

Owners' Title Policy

This title policy is an optional insurance that offers protection to a home buyer. You will normally pay a one-time fee at closing. The policy remains active for as long as you own the property.

Lenders' Title Policy

A lender often requires this type of policy in a purchase or refinance transaction. It does not protect the buyer in any way if there is a title dispute. It only protects the lender's interest. The lender may allow you to roll the fee into the mortgage payment instead of paying out-of-pocket.

Why Consider Title Insurance?

There are two main reasons why you should consider title insurance:

  1. It may be required by your lender. This is especially common with a lenders' title policy-your lender requires that you carry this policy in order for the loan to be funded and process closed.
  2. You may want to purchase an owners' title policy as well. There are a number of potential problems with title that while un-common, do occur often enough to be a real concern. These concerns the following:
  • Fraud or Forgery
    You have purchased a home that you believed to be 100% legitimately owned. However, if the previous "owner" was not a legitimate owner due to fraud or forgery, and you do not have title insurance, you may have to face a legal battle to clear title.
  • Contested Wills
    A contested will can means that an heir to the previous owner sold a piece of property that they did not have rights to sell. Being on the wrong side of one of these conflicts may also require a legal battle to clear title.
  • Missing Heirs
    Along the same lines, if a missing heir of the previous owner appears, even months or years later, they may still have a legitimate claim on the property. This spells disaster for an unwary homeowner and may also require a legal battle to clear title.

Cost of Title Insurance

The cost of title insurance will vary from one situation to another and one property to another. The purchase price or property value is the primary basis of the cost-with certain fees added for closing. This difference could be significant, so it is worth checking into different options with different title companies first before you finalize any paperwork.

For Example:

If you purchase a home for $350,000 in Los Angeles County, you can expect an Owners and Lenders Title Policy to cost approximately $1,750 typically 0.50% of the price or loan amount). This is a one-time fee paid at the closing of escrow.

Title Insurance is Important

Title insurance may seem like an added expense, and something you will likely never need. However, the one-time cost is often low enough that it is well worth the investment to protect yourself and your heirs from the potential disasters and legal battles that issues on title will give rise to.

Title insurance is one of the closing costs that you are allowed to shop around for, so take some time and get quotes from a few different title companies for the lowest cost before you make your final decision.


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