You’re in the market for a house, but you keep hearing about this thing called title insurance. What exactly is title insurance and do you really need it?
Don’t worry. We got your back. We’ll break down what it is, how it works and why we recommend it.
- What Is Title Insurance?
- Types of Title Insurance
- Owner’s Title Insurance
- Lender’s Title Insurance
- How Does Title Insurance Work?
- What Happens if I Don’t Have Title Insurance?
- How Much Does Title Insurance Cost?
- Do I Need Title Insurance?
What Is Title Insurance?
Buying property can be an incredible investment. (And if you’re buying a house for the first time, check out our free Home Buyers Guide.) If you’re not careful though, you could be buying more than what you bargained for.
Title insurance protects your property in case there’s ever a question of ownership. Let’s say newlyweds Steve and Jess decide to buy their very first home on some property with cold, hard cash (amazing, right?). Since they didn’t have to deal with a mortgage company, they didn’t think to look into the title (which also means they didn’t get title insurance). Well, a few years later, a family knocks on their door and tells them they came to claim their late great-granddad’s land.
Yikes. How could that be? And who really owns the property?
Well . . . unfortunately, both parties are owners. This is why having title insurance is so important—it ensures you have a clear title and won’t have anyone knocking on your door to claim their property down the road. A standard owner’s title insurance policy also protects you from things like back taxes, liens, fraud, forgery, wrong signatures on documents and incorrect records.
Types of Title Insurance
There are two types of title insurance: owner’s and lender’s. Most mortgage companies will require you to get lender’s title insurance to protect themselves, but owner’s is optional.
Owner’s Title Insurance
Owner’s title insurance covers you (the owner) from being sued if someone has a beef with your property. Let’s say the previous owner had a lawn care specialist . . . but stopped paying their bill before they sold the home to you. The lawn care company put a lien against the home in hopes the owner would settle up. (A lien is a legal right to someone’s property until they settle their debt.) But if you didn’t get title insurance, the previous owner’s lawn care bills are now your problem.
Lender’s Title Insurance
A lender’s title insurance policy is the most common and protects your lender or mortgage company from any title issues with the home. So in our previous example, if Good Sons Lawn Service wants to get paid, your lender is protected . . . but you aren’t. That’s why it’s important to get both lender’s and owner’s title insurance.
How Does Title Insurance Work?
Again, title insurance is the protection you need to make sure your property won’t have any awkward and unwelcome visitors or bills in the future. We all have a past. It’s always awkward when you run into your ex at the supermarket and they ask about their old sweatshirt (the one you threw away). Likewise, title insurance ensures that your property won’t get a visit by its ex asking for their share of the home.
Once you purchase title insurance, your title insurance company will do a title check. They’ll be searching for liens on the home, making sure the owner you’re purchasing the house from is the true owner, and checking that there’s nothing unsavory in the property’s past. You’ll want to get the all-clear from the title company before you buy the property.
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If anything comes up, like that really large lawn care bill, or if the property is in the middle of a messy estate war, that should be a red flag you pay attention to—unless you’re willing to pay up for someone else’s mess.
A warranty of title is another option some people choose, but only for private transactions. With a warranty of title, the seller is guaranteeing to the buyer that they have the right to transfer ownership and no one else has any other claims to the property.
What Happens if I Don’t Have Title Insurance?
First, if you’re using a mortgage company, you won’t have a choice. You’ll have to buy at least lender’s insurance. But if for some reason you don’t get it, and the seller doesn’t buy it, this could come back to bite you later. It might take years before an issue could crop up, but then, out of the blue, someone could come knocking and challenge the ownership of the property.
Or if the title search missed something, like liens or back taxes, you could be held responsible for paying that money back. Not good.
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How Much Does Title Insurance Cost?
The cost of title insurance can vary pretty widely depending on where you live and the purchase price of your home or property. It can range from $500 all the way up to $3,500.1 It’s often lumped into your overall closing costs and sometimes you can even get the seller to pay for it.
Your mortgage company will offer to do the title shopping for you. But since you’re the buyer (and the boss), you get to decide. So depending on the state you live in, you might be able to shop around for a better price.
Owner’s and lender’s policies are also slightly different in price. Owner’s policies are based off your home’s purchase price—usually around 0.5% of the purchase price.2 On the other hand, a lender’s policy is based off the loan amount.
And here’s the good news! With title insurance, you only pay it once per property. So you can get it and forget it. You won’t be paying premiums every month like your homeowners insurance policy. And if you buy owner’s and lender’s title insurance policies together, you can get a discount called simultaneous issue rate. Sweet!
Do I Need Title Insurance?
You should get a title insurance policy anytime you buy real estate. No ifs, ands or buts about it. Title insurance is a must-have when you’re purchasing your next home, land or property. And again, most lenders will require it.
Being a property owner is expensive enough as it is. There’s no need to pile on more costs (that you don’t even know about yet), especially if you don’t have to.
Want to learn more or even get set up with title insurance of your own? Get in touch with an insurance agent who is part of our Endorsed Local Providers (ELP) program. They’re RamseyTrusted and can help you find affordable coverage on the things that matter. They can also answer any of your questions about what exactly you need.
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