Title Insurance Definition
Title insurance refers to a type of indemnity insurance that gives the holder a sense of security from monetary loss arising due to defects or damages in the property’s title. One of the most general types of title insurance is that of title insurance of lender, that involves the buying of coverage by the borrowing party in order to safeguard the lender’s interests. The selling party pays for the title insurance of the owner so as to safeguard the equity of the buying party in the property.
Key points to remember
- Title insurance is a kind of indemnity insurance that offers a financial cushion to the holder from the losses that may arise from defects in the property’s title.
- Back taxes are the most general claims that are processed against a title. A title company, a lien, etc. usually misses out on these types of claims.
- Title insurance calls for payment of fee only once, and covers expensive administrative expenses for in-depth research of title data dated extremely back to the 1800s era.
A Little More on What is Title Insurance
When it is about making transactions in the real estate industry, it is important to have a clear title. Every title needs to be identified or searched by a title company so as to observe any type of claims or liens prior to their issue. A title search refers to an inspection of public records so as to authenticate the lawful ownership of the property, and to ascertain if the property has any claims. However, a title can be referred to as ‘dirty’ in case of unreliable surveys conducted or unsettlement of building code breach.
With title insurance, both lenders and property owners can protect themselves from losses or defects arising from liens, obstacles, etc. in the title or real property’s ownership. While conventional insurance saves people from prospective losses or damages, title insurance saves them from damages caused in the past.
The title insurance policy of the owner offers coverage against the given circumstances:
- Ownership of property by some other person or party.
- Wrong signatures provided, forgery, and fraudulent transactions involving title documents,
- Poor maintenance of records.
- Constrained covenants that negatively affect the value
- Hindrances or decisions made against property
Purchasing Title Insurance
Once the property purchase contract gets completed, a closing agent commences the insurance procedure. The escrow agent or attorney makes recommendations for one of the 5 top title insurance underwriters in the United State, and they are:
- First American Corp.
- Fidelity National Financial
- Stewart Title Guaranty Co.
- Old Republic National Title Insurance Co.
- Several local independent organizations
Though different provinces may have different title insurance costs, but generally, it costs around 1% of the total buying price of the property. For instance, a California-based property that is worth $500,000 will have the title insurance ranging anywhere between $1200 and $2000.
Types of Title Insurance
Title insurance comprises of two types: lender’s insurance and owner’s insurance. The borrowing party should buy a lender’s title insurance policy so as to save the lender from the event when the selling party cannot make the lawful transfer of ownership privileges or rights. This type of title insurance only safeguards the interests of the lender. An issued policy states that the process of title search has been completed, thereby providing a sense of satisfaction to the buyer.
Title searches are prone to errors, and it is the owner who may have to bear the risk. That’s why, it is important to have some more coverage with an owner’s title insurance policy, that the seller buys for safeguarding the interests of the purchaser against title defects. However, buying this type of title insurance is not mandatory.
Banks and financial institutions purchase a general lender’s title insurance policy for protecting mechanics liens and several other liens that are not recorded, followed by unlisted access rights, or other unlisted information.
Most of the times, the combination of a lender’s as well as owner’s policy is needed for ensuring that every party is covered. Once the deal is closed, parties buy title-insurance with one-time payment of fee. In order to avoid any misuse of rights, the Real Estate Settlement Procedures Act prevents sellers from buying from a particular title insurance provider.
Risks of Not Having Title Insurance
In case, there is no title insurance bought, it will put the parties involved in risky situation, especially if there are some defects involved in the title. In the absence of the title insurance, the buyer alone would be liable for paying back taxes or property taxes that the previous owner has not incurred. The buyer, in this case, will have two options: either to bear the remaining property taxes or let the taxing institution possess the home or property. In the title insurance, the buyer remains covered till the time he or she is interested in the property.
Lending institutions like banks get covered from non-recorded liens, or other damages with lender’s title insurance. If the borrowing party makes a default that further causes defects in the property title, then the lending party would get coverage for the amount of loan.
Before buying any property, it is important for the real estate investors to ensure that no property has a bad title. Let’s say that there can be many pending issues associated with homes in foreclosure. Buyers may prefer buying owner’s title insurance for safeguarding themselves against the title’s unpredictable claims.