Title Insurance: A Critical Component of Every Transaction
There are numerous closing costs that today's homebuyer pays at the closing table when purchasing a new home. From underwriting fees to processing fees, from tax service fees to wire fees, from attorney fees to recording fees; however, there is probably no closing cost that I receive more questions about than title insurance. Ironically, title insurance is probably one of the most critical components in the residential real estate transaction, providing not only smooth closings, but also helping to reduce risk in the secondary mortgage market, a big player in today's economy.
So what is title insurance? Title insurance provides the insured, usually a lender or a homeowner, with protection from unknown defects in the title to property. This protection insures the proper transfer of property from a seller to a buyer. Much like a homeowner's insurance policy protects the homeowner and the lender from hazards such as fire, title insurance will cover losses due to problems ranging from actual ownership to unknown liens. The types of defects covered include: false impersonation of the true owner of the property, forged documents, undisclosed or missing heirs, mistakes in recording legal documents, misinterpretations of wills and fraud. There are many other matters covered which are too numerous to cover here.
In a sale, a mortgage lender is going to take great pains to reduce their risk associated with the homebuyer defaulting on their loan. This due diligence includes checking the homebuyer's credit among other financial considerations. The lender is also going to reduce their likelihood of loss from the property securing repayment of the loan, our homebuyer's new home. The lender will appraise the value of the property. They will require the homebuyer to obtain homeowner's insurance protecting against hazards such as fire. The lender will also want to make sure there are no problems with title. This is accomplished by having the homebuyer purchase a loan policy of title insurance. However, the loan policy only protects the lender's interest. It does not protect the homebuyer. That is why I usually recommend homebuyers purchase an owner's policy of title insurance. The owner's policy protects the homebuyer against loss due to unknown title defects. It also protects the homebuyer's interest from certain matters which may exist, but may not be known at the time of the sale. This protection lasts as long as the homebuyer or their heirs have an interest in the property.
Under a loan policy, if some issue arises affecting the past ownership of the property, the title insurance company would defend and protect the interest of the lender. However, the homebuyer would have to assume the financial burden of her own legal defense. If the defense is unsuccessful, the outcome could be a total loss of title. In that case, the homeowner would lose their down payment and any equity built in the property. The lender would be compensated for their losses and they would assign the loan to the title insurance company. As such, the homeowner would still owe the balance due on the note.
When a homebuyer obtains an owner's policy simultaneously with a loan policy there is a significant discount. When the simplest of title problems arise, the cost of hiring an attorney to investigate the issue is very often much higher than the nominal cost of the owner's title insurance purchased along with a loan policy. In some cases, an owner's policy of title insurance will allow a sale to proceed, even with minor title problems, saving a seller who has an owner's policy the costs involved in the delay selling her property.
Much of today's residential real estate transaction is controlled by title insurance. It allows the lender and secondary mortgage market to not have to worry about the security of their loans. It also allows the homeowner not only potential savings in money and time, but most importantly, peace of mind.