Buying a home can be an anxious, emotional, and stressful time for many people. Understanding owner’s title insurance and why it’s important can help.
Each year, more than 80 percent of homebuyers choose to purchase owner’s title insurance. Owner’s title insurance protects the insured from financial loss related to the ownership of a property. There are two policies in the mix at a home loan closing: the lender’s policy, which is required, and an optional owner’s policy. Both are a one-time, upfront cost—not a monthly premium that will be added onto your mortgage payment.
When you’re in the process of buying a home, a title research company will check the property’s ownership history. Ideally, your new home has what’s called a “clear title.” That means the current owner, who is selling to you, has a complete ownership stake in the property, without any legal claims against it. Claims can be in the form of a lien or levy from a lender, creditor, or—in the event of taxes due—the government. Unexpected title claims include the following:
- Outstanding mortgages and judgments, or a lien against the property because the seller has not paid his taxes
- Pending legal action against the property that could affect you
- An unknown heir of a previous owner who is claiming ownership of the property
If the research company doesn’t find any outstanding claims or title defects, why should you buy title insurance? Because an as-yet-undiscovered issue could cloud the ownership of the property years after the purchase. That could be a mistake in the ownership history, an oversight committed by the title researcher, or even a previously unknown heir. Maybe there’s a pending lawsuit or legal judgment. A title issue could also arise as a matter of fraud.
A title defect that arises after a loan closing could, at the very least, mean a variety of legal costs and, in a worst-case scenario, the loss of your property and the money you’ve put into it.
Lenders insist on title insurance to protect their interest in the loan. And that makes sense, because they’re on the hook for the majority of the home’s value, especially in the early years of the mortgage.
When you purchase your home, you receive a deed, which shows the seller transferred their legal ownership, or “title” to their home, to you. Title insurance can protect you if someone later sues and says they have a claim against the home from before you purchased it. Common claims come from a previous owner’s failure to pay taxes or from contractors who say they were not paid for work done on the home before you purchased it.
Most lenders require you to purchase a lender’s title insurance policy, which protects the amount they lend. You may want to buy an owner’s title insurance policy, which can help protect your financial investment in the home.
You can usually shop for your title insurance provider separately from your mortgage. If you shop for title insurance, you may be able to save money. If you choose to buy owner’s title insurance, the total cost will usually be lower if you use the same provider for both the lender’s policy and the owner’s policy, compared to buying them separately.
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