There are many requirements you must meet when you purchase a home. You have to qualify for the loan financially as well as meet state and local requirements. Aside from the fact that you must be able to pay your taxes and have homeowner’s insurance, you must have title insurance. This is not the same as a title examination. It is not enough to say there is clear title – the title company must provide insurance in order to protect the lender and possibly you from future issues.
What is a Title Examination?
The title examination is a process conducted by a title company or attorney. The chosen person goes over the history of the home, namely the chain of ownership. They trace the ownership as far back as they can go to determine that no issues occurred with any transfer of ownership. In other words, they determine that no illegal transfers occurred through the years. If ownership transferred illegally, someone down the line could have rights to the home. This is what the examiner needs to determine. If there were such a case, you would not be able to purchase the home because it would be uninsurable.
The examination also determines that there are no other liens or issues with the title. The examiner looks for things like unpaid mortgages, mechanic’s liens, or outstanding judgments. If you were to take ownership of the property with the liens, you could be held liable for them, which puts you and the lender at risk.
What is Title Insurance?
Title insurance is something different from the exam. There is title insurance for the lender, which is required to purchase the home. There is also an owner’s policy, which you can take out which protects you from any errors from coming up in the future.
Lenders require title insurance in order to protect them from error. This is not a common occurrence, but sometimes there is an issue where a lien or mistake with ownership goes unnoticed. If this person were to come forward down the road, you could lose your ownership rights and the bank would lose its investment in the home. The lender prevents this with a lender’s policy. It even protects against human error.
Your title insurance premium depends on the amount of the loan. The amount varies by area, but in general, you can expect to pay 0.5% of the loan amount. For example, if your loan amount was $200,000, the title insurance premium would be $1,000. In some cases, the seller is willing to split the cost with you to help you purchase the home. If you want an owner’s policy, it is an additional premium, but it is usually much lower than the lender’s policy.
What an Owner’s Policy Covers
The owner’s policy differs slightly from the lender’s policy. The owner’s policy can protect against things like:
- Forged documents, including mortgages due to identity theft
- Issues with closing documents (missed documents)
- Recording mistakes
- Encroachments from neighbors
In some cases, the owner’s policy can also protect you against zoning issues and future defects, which the initial title examination overlooked. This makes it possible for you to refinance and/or sell the property in the future without any repercussions.
How the Owner’s Policy Differs
The owner’s policy differs in two areas – the amount of the policy and the occurrences it protects against. First, the owner’s policy protects the entire value of the home. Specifically, it protects your equity. The lender’s policy simply covers the loan amount. Unless you have a VA loan and did not make a down payment, this amount is lower than the value of the home. If something were to come up down the road pertaining to a missed claim during the title examination, you would have to pay for everything involved in the process without an owner’s policy. With the policy, the insurance company covers your expenses. In the worst-case scenario, you could lose your equity or even your home altogether without the right protection.
Paying the Insurance Premium
Luckily, title insurance premium is not a recurring cost. You pay the premium once and receive coverage as long as you own the home. You do not have to pay the owner’s policy premium again unless you purchase another home. The exception to this rule, however, is if you refinance in the future. In this case, you have to purchase a new lender’s policy. This occurrence includes not only new insurance, but another title examination in order to ensure the title is still clear. During the process, the title company removes the old lender from title, replacing it with the new lender and loan amount. Luckily, the premium on subsequent lenders’ policies is usually lower, especially if you bought the home within the last 15 years since an exam was already done at that time.
There is a stark difference between the title examination and title insurance, but both are necessary. If you overlook the need for either item, you put your home at risk. There is no guarantee that an issue with ownership or a lien will not come up down the road. The title examiner does his/her best to ensure a clean title, but certain issues have a way of hiding. Paying for the lender’s and owner’s policy is the best way to protect yourself and your home.