When you’re preparing to close on your new home, it seems like there are at least a million and one details to sort out. Title insurance is one of those myriad details, and it’s an important one. Who pays for title insurance? Why is this protection so crucial? When you’re buying a home, those are questions that you’ll definitely need answered.
Importance of Title Insurance
A deed is a legal document that states that you have title to the property. What does it mean to have title to a property? As Realtor.com explains, a real estate title isn’t a document or tangible thing. It’s a legal concept. Having title to a property means that you are the owner of it and that you have all the rights and responsibilities that come with that ownership.
So, what is title insurance? Who pays for it? And why is it so important?
Defining Title Insurance
An insurance policy is a contract designed to protect its purchaser from a specific type of risk. With title insurance, the policyholder is shielded from the potential financial fallout of a problem with their title to a property. As Investopedia reports, title companies complete record searches to verify that a property’s title is clear before a real estate purchase is finalized. However, property records can extend back for centuries, and it’s always possible that something will be overlooked. That’s why title insurance exists. If a problem with the title is discovered after ownership is transferred, it could create major headaches for both the new owners and their lender. Title insurance provides a financial safety net for those who have a policy.
Owner’s Title Insurance vs. Lender’s Title Insurance
Who benefits from a title insurance policy? That depends on the type of policy. As The Street indicates, there are two types of title insurance:
- Owner’s Title Insurance: An owner’s title insurance policy protects the homebuyer from financial losses resulting from title defects for however long they own the home.
- Lender’s Title Insurance: In the early days of a mortgage, the lender often owns the lion’s share of the interest in a home, so they have a lot to lose if a title issue arises. That’s why most lenders insist on being provided with a lender’s title insurance policy to protect their interests in the event of a problem with the title.
Who Pays for Title Insurance?
Both types of title insurance are purchased with a relatively inexpensive, one-time payment. Forbes reports that the average cost of a lender’s policy is $544. Meanwhile, the average price tag for an owner’s policy is $834.
Who foots the bill for title insurance? As with many things in a real estate transaction, that depends. According to the Chicago Tribune, there is no legal requirement that either homebuyers or sellers pay for title insurance. However, there are customs and practices that set expectations, and these unofficial codes of conduct vary from place to place. Generally, lenders insist on having a policy before they’ll approve a home loan, so anyone who is using a mortgage to fund their home purchase should expect to pay for a lender’s title insurance policy. In some states, the seller pays for the owner’s title insurance as a show of good faith. In other areas, the buyer traditionally buys their own policy. However, buyers always have the option of asking the seller to pay for one or both policies while negotiating to buy the home.
Why Title Insurance Matters
Title defects, recording or filing errors, previously unreported liens or easements, undiscovered heirs, and frauds or forgeries can all create title troubles and major financial and legal headaches for homeowners. Granted, these are not common problems. According to Forbes, roughly five percent of those with title insurance receive payments from their policy. However, title insurance offers a relatively inexpensive way for homebuyers to safeguard their investment in their homes.
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