While it may seem like just another mysterious fee hidden in the fine print, title insurance does serve a purpose. You may know that lenders require a policy and that you or the seller will pay for it. But do you actually know what title insurance is and why you need it?
Title insurance covers potential damages from mistakes in the ownership records of your property. You’ll be required to purchase title insurance if you get a mortgage
. Unlike other insurance, title insurance protects the lender or homeowner, even though the buyer pays for it.
Even though the title insurance policy protects the homeowner or lender, both types will be your responsibility to cover as part of closing costs. There is also an optional title policy that protects the homebuyer as well.
Here’s how title insurance works, how to decide whether you need your own policy, and how much you can expect to pay.
What is Title Insurance?
Title insurance pays the policyholder for any errors in a property title. Deed records are not always 100% accurate. So someone with an older title can press a claim on your newly purchased home. Title insurance will pay to protect your title rights. It also serves as compensation if you end up losing the property.
Types of Title Insurance
There are two types of title insurance: lender’s and owner’s. If you get a mortgage, lenders require you to pay for lender’s title insurance as part of closing costs
Lender’s Title Insurance
Lender’s title insurance protects the mortgage lender. While it’s for the mortgage lender’s benefit, the buyer must pay for it. Lender’s title insurance policies ensure that the lender has the first lien on the house if it’s foreclosed or has unpaid property taxes. When these situations occur, the lender will want to be the first in line to receive the proceeds.
The one instance you wouldn’t have to pay for a lender’s title insurance is if you pay for a home with cash. If you don’t borrow any money to buy the house, you don’t need to buy lender’s insurance. If you’re paying for a home with cash, lender’s title insurance is not mandatory, but it’s still in your best interest to get coverage.
Owner’s Title Insurance
Owner’s title insurance is optional and can be paid for by the buyer or the property seller. Title insurance coverage will take effect as soon as you buy the policy and last indefinitely. The good thing about title insurance is that it will cover known and unknown mistakes in the ownership history documents.
Unlike lender’s title insurance, owner’s insurance solely protects the property owner. Let’s say, for example, there is suspected forgery with the title. In that case or any related legal matters, the fees would be covered by the owner’s title insurance. Or, let’s say the previous owner of the house left the property with unpaid fees. In that case, your owner’s insurance would cover the costs.
Why Do You Need Title Insurance?
If you purchase a house with a mortgage, you’ll be obligated to buy a lender’s title insurance. But it’s also a good idea to protect yourself with title coverage. Numerous legal situations can arise where title coverage will be helpful. It will come in handy and compensate you for damages when unexpected events come up. Here are a few instances when title insurance can protect you:
- If you purchase a house that previously had unreported liens or easements on the property
- If you are buying a property that has previously transferred ownership rights through forgery
- Accidental errors in record-keeping and documentation
- Any other title defect that came before you purchased the title insurance policy
Since there are so many documentation error possibilities, it’s best to protect yourself. You could end up saving yourself thousands of dollars in legal fees by paying one small fee upfront. If you purchase a foreclosed or otherwise problematic home, your odds of getting a defective title increase. The worst-case scenario would be if you had to forfeit the entire property. In that case, title insurance would compensate you.
How Much Does Title Insurance Cost?
The cost of Mandatory lenders title insurance will vary depending on what state you’re in. It usually costs between $500 to $1500 but can be more if you borrow more. Location will be the most significant determinant of cost. Every state has different standards regarding title insurance.
Homeowner’s title insurance is optional and generally costs more. Depending on what type of coverage you buy, it can cost anywhere from $700 to $2000. It could even cost more for people who have:
- Lower credit scores
- Larger loan amounts
- Smaller down payments
You might save some money by skipping on homeowners’ title insurance. But if anything comes up in the long run, homeowner’s title insurance will protect you because it doesn’t have an expiration date. So it could end up protecting you even after you’ve sold the house and moved on.
In some instances, it might be possible to negotiate sharing title insurance costs with the seller and lender. This is a matter of practice that will vary by jurisdiction.
Can You Choose Title Insurance?
You can choose your own title insurance company, but few people actually do so. It makes more sense to do research and shopping if you buy a homeowner’s policy for yourself. Many times title insurers offer incentives to purchase both sets of policies together.
Risks of Not Having Title Insurance
As mentioned above, lender’s title insurance is mandatory unless you’re paying for the house in cash. Owner’s title insurance is optional, but experts still recommend it.
Without owner’s title insurance, you’ll be required to pay for anything that pops up down the road. Unforeseen title issues can be very costly. For example, you might need to hire an attorney to dispute ownership claims on your behalf. Or, you might be stuck with unpaid property taxes from the previous owner. Without owner’s title insurance, you’ll likely have to foot the bill yourself.
Hire a Real Estate Contract Attorney in St Petersburg, FL
If you’re considering purchasing a house in St Petersburg, Florida, contact us today. Our attorneys
, Ross and Purdun at Battaglia, Ross, Dicus & McQuaid, P.A. have extensive experience that can help you draft and review your contract and advise you on the following steps to secure your transaction.
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