title insurance document

Title Insurance: What You Need To Know

Victoria Araj6-minute read

October 05, 2020

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When buying a home, one of the many essential steps in the process is obtaining title. This legal concept confirms that you have received ownership rights for the property from the seller. But what happens if there are legal or financial problems with the sale? Your new home could end up costing you more than the purchase price in unforeseen complications.

That’s where title insurance comes in. If you’re shopping for a home, title insurance is a must-have. We’ll break down exactly how it works and what makes it so important.

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What Is Title Insurance?

Title insurance is meant to protect home buyers, as well as lenders, from any damages or losses caused by a bad title. Most title insurance policies cover all the common claims filed against a title, including:

  • Outstanding liens
  • Back taxes
  • Conflicting wills

Any number of things can spoil your legal ownership of a property and make a title “bad,” from code violations to legal complications. You could, for instance, discover after purchasing a property that the seller does not actually have any legal claim to it or that their claim is being disputed by another party. The last thing you want is to put down serious money on a property, only to find that some unexpected issue renders the title invalid. A title insurance policy protects you from that.

If you’re working with a title company, you’re less likely to encounter these problems after the fact. But it still pays to have a policy. In fact, title companies offer policies alongside their title search, which is the process during which a title company ensures that the seller has the legal right to transfer the title to you. With title insurance, buyers and lenders are protected against any deficit in the title that might cause serious losses.

Now that we have the basics covered, let’s look more closely at the two types of title insurance.

What Is Owner’s Title Insurance?

Most owner’s title insurance policies are purchased by the seller as a guarantee against potential hazards. Even if you’ve hired a title company to research properties, there’s always the chance that something will slide under the radar. Although optional, an owner’s policy typically protects the home buyer from the most common risks, including:

  • Conflicting ownership claims, such as will complications and similar disputes
  • Outstanding lawsuits, liens and other encumbrances against the property that invalidate the seller’s legal claim
  • Erroneous or flawed records, including honest mistakes like incorrect signatures
  • Outright fraud and/or forgery
  • Undisclosed easements or other agreements that may limit the usage or reduce the value of the property

What Is Lender’s Title Insurance?

A lender will always require the borrower to purchase a lender’s title insurance policy before obtaining a home loan, and the policy is usually issued by the title company to mark the conclusion of their title search. The basic functionality is the same as that of an owner’s policy: to protect the lender against potential losses in the event that the seller is not legally able to transfer title rights. The lender is covered up to the amount of the mortgage. Only the lender is protected by such a policy, however. If you end up saddled with back taxes and aren’t personally insured, a lender’s policy won’t protect you, but an owner’s title insurance policy will.

Alternatives: Warranty Of Title

A warranty of title is a guarantee by the seller that they have the legal right to transfer ownership to the buyer and that no one else can lay claim to the property. If it turns out that someone else has a claim on the property, the warranty grants the buyer legal recourse against the seller.

Although many transactions include a warranty of title by default, some don’t. Estate sales, auctions and similar circumstances in which the seller is a representative rather than the owner may not include a warranty of title, because the representative is not aware of any conflicting claims. In such a situation, a home buyer may still want to consider purchasing a title insurance policy.

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What Does Title Insurance Cost?

Depending on the insurance provider and the state in which you live, a policy can cost $500 – $3,500. If the seller is the one purchasing the owner’s policy, the cost could be factored into the sale of the property.

The insurance process is usually initiated by a third party, such as a closing agent, once the property purchase agreement has been completed. It’s not uncommon for both a lender’s and an owner’s policy to be required by this process in order to make sure all parties involved are protected. Both policies can be purchased for the one-time fee mentioned.

Do You Really Need Title Insurance?

Although lender’s title insurance is almost always required, an owner’s policy is optional. That being said, the consequences of not purchasing owner’s title insurance can be dire. Should unpaid taxes, outstanding liens or fines for code violations rear their ugly head after the property has been purchased, then the financial burden will fall solely upon the uninsured homeowner.

With a title insurance policy, the homeowner is protected for as long as they own the property. But if you’re not able to cover these unexpected costs, then you could be responsible for a lot more than you bargained for. And, if you’re unable to make these new payments, your home could be forfeit to the entity that’s come to collect – all through no fault of your own. The same goes for any complications with the chain of title. Without title insurance, your dream home can very quickly become a nightmare.

Ready To Begin Your Search?

Buying a home can be a stressful experience. Fortunately, there are ways to protect yourself, including title insurance, which can offer peace of mind. If you’re ready to start looking for a new home, make sure you choose the right title company to help you in your search. There’s a lot of information to sort through and a lot of options to consider, and Rocket Mortgage® is a good place to start.

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Victoria Araj

Victoria Araj is a Section Editor for Quicken Loans and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.