If you are going to buy the most expensive purchase in your life, you better get title insurance to insure that what you are buying is truly yours.
In short, title insurance is absolutely necessary when buying a home. If you buy a brand new car for $50,000, you sure as heck are going to get car insurance just in case you or someone totals your car.
Why Title Insurance Is Necessary
When a property is financed, bought or sold, a record of that transaction is generally filed in public archives. Likewise, records of other events that may affect the ownership of a property, like liens or levies, are also archived.
When you buy title insurance for your property, a title company searches these records to find – and remedy, if possible – several types of ownership issues.
First, the title company searches public records to determine the property's ownership status. After this search, the underwriter will determine the insurability of the title.
Even the most skilled title professionals may not find all problems associated with a property, though. Some risks, such as title issues due to filing errors, forgeries, or undisclosed heirs, are difficult to identify.
After the title company finishes its searching, it also provides a title insurance policy that will help protect you from a variety of issues that might be uncovered later.
Lenders Require Title Insurance
If you take out a mortgage loan when you buy your property, your lender will require a loan policy of title insurance. This protects the lender's interest in your property until your loan is paid off or refinanced.
If you buy a property with cash, then you don't need to buy title insurance. But the risk is all on you.
An owner's policy of title insurance insures your ownership rights to the property. Even though you'll pay for this policy only once, your coverage will last as long as you own your home.
When you buy a property, the title must be clean, verifying that the seller really does own the property and is free to sell it.
“One out of every three searches reveals a title or public record defect that’s fixed before the transaction closes,” says Jeremy Yohe, spokesman for the American Land Title Association, a Washington, D.C.-based trade association.
Homebuyers typically need two title insurance policies: an owner’s policy and a lender’s policy, which protects the lender.
Title Insurance Questions To Ask
Here are some important things to know before buying your first house and questions to ask about getting title insurance.
1. How much coverage do I need?
Owner’s policies typically protect against a number of contingencies, such as fraud, forgery, undisclosed heirs and spousal claims.
Additional coverage could boost the cost. For example, a restriction endorsement could protect you if the construction of your home inadvertently violates the restrictions of your subdivision, Pellegrini says.
Also see this article on How Much Does Title Insurance Cost?
2. Who usually pays for title insurance?
The party responsible for paying for the two policies — the buyer’s and the lender’s — varies from state to state and sometimes from county to county, Yohe says. In some areas, the buyer may pay for one; the seller, the other.
That doesn’t mean that if the buyer pays, he can’t haggle over all or part of the cost. It can always be negotiable.
If you’re buying the owner’s and lender’s policies from the same company, “in many cases, there’s a substantial discount,” says Orlando Lucero, vice president of the New Mexico Underwriting Counsel at Fidelity National Title Group in Albuquerque, New Mexico.
3. Which title company to use?
If you pay for the title insurance, you have the right to select the company. If you’re not paying but want to choose the company, be prepared to share some of the costs.
Be wary if the seller is pushing his title company. A title search finds errors before you buy. Use the same company that your seller did years earlier and odds are you’ll get the same results.
Often, searchers aren’t using actual records but summaries or extracts of those records. A fresh set of eyes (and extracts) could unearth problems, allowing you to fix them before you buy.
Every buyer must thoroughly inspect the background of the title company and the escrow officer to make sure he or she is legit.
4. Who to trust?
The selling agent is on the seller's side. Your agent should be on your side. But the entity most on your side is the lender, the bank who is taking the risk to lend to you. Their interests are aligned with yours.
The lender is guaranteeing a large amount of money based on the assurance that the property you’re using as collateral is really yours.
Title Insurance Is A Must
There are plenty of closing costs when it comes to buying or selling a house. Usually, the seller bears most of the costs, including the real estate transfer tax fees, commissions, and so forth.
But the buyer pays for these costs by paying a higher real estate purchase price.
If you are going to spend huge money on a house, you should make sure it is yours. The older the house, the more important title insurance is since you don't know what went on 50-100 years ago.
At the end of the day, title insurance will likely cost you around $800 – $1,200. There are title insurance companies everywhere. Feel free to negotiate and maybe even get the sellers to pay.
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