By: Robert Wall II, Supervising Attorney
Let’s face it, navigating the home buying process can be stressful. Most individuals will purchase a home only 2-3 times over the course of their lifetime. As a result, we lack the understanding and experience needed to eliminate stress with the process. This anxiety can be heightened when we encounter terminology or decisions that, while commonplace for real estate professionals, are not factors we typically consider in our day-to-day lives. One of the most common aspects of the home buying process that I see contributing to homebuyer confusion is Title Insurance. Title insurance is one of the most important steps a person can take to protect themselves and their investment; but unfortunately, it is also one of the most misunderstood aspects of the transaction.
What is Title Insurance?
The rights surrounding the ownership and use of a residential property are represented by the Title and Title Insurance protects a property’s title from defects. Title Insurance safeguards the interest of the property owner, lender, or both against loss or damage arising from defects or liens which are not excepted or excluded in the policy. Unlike other types of insurance products, which protect against some anticipated future event (think homeowners’ insurance, auto insurance, life insurance etc.), Title insurance provides coverage for claims or losses caused by title defects which are the result of some PAST event. Generally speaking, the categories of risk covered by Title Insurance include:
- Unknown Risks – Title defects that cannot be found even when the most diligent public record search is conducted (forgery, fraud, deed executed by individual lacking proper legal capacity, invalid conveyances due to incompetence or duress, etc.)
- Undiscovered Risks – Title defects that were missed by the title searcher and/or attorney during the title search (liens, judgments, or other encumbrances/defects that attach to property)
- Known Risks – Title defects or risks that have been disclosed. The Insurer may determine the risk of a claim is so slight that the company is willing to accept the risk and insure over the title defect.
Types of Policies
For purchase transactions with a loan obtained to purchase real property, two title insurance policies will be involved.
- Loan/Lender’s Title Insurance Policy – When a loan is obtained to purchase real property, the lender will always require the buyer to purchase a loan/lender title insurance policy. This policy provides the lender with assurances as to the priority, enforceability, and validity of its lien (mortgage). The loan policy protects the lender’s security interest in the property, up the loan amount, in the event a title issue arises in the future. The lender’s title policy does not offer any protection to the buyer.
- Owner’s Title Insurance Policy – An owner’s policy protects the buyer/ homeowner from title defects that predate their purchase of the property. The policy is issued in the amount equal to the purchase price of the property and is obtained with a one-time premium paid at closing. Owner’s title insurance, while optional, is highly recommended to protect the homeowner’s investment in the event a title issue arises during or after a home purchase. The owner’s policy places legal and financial responsibility on the insurance company, up to the policy amount, for the life of the homeowners’ ownership of the property.
Title insurance premiums are paid via one-time payments at closing. When a lender’s policy and an owner’s policy are purchased simultaneously, the title insurance underwriter will apply a lower premium called the Simultaneous Issue Rate, since the policies are being purchased together.
Title Insurance Benefits
Discovery of a title issue after closing can be a devastating event resulting in substantial financial loss for those without the protection of title insurance. Such an event will result in significant legal expenses and could potentially yield a total loss of ownership interest and financial investment in the property.
Title insurance provides protection against that eventuality and is critical to the security of any real estate investment. It preserves a buyer’s long-term investment and ensures they are safeguarded against the devastating financial effects associated with title issues.
Title insurance provides buyers with peace of mind that they, and their property, will be protected for the duration that they (or their heirs) own the property.
If you have questions about title insurance or would like to discuss the topics outlined in this article, please contact Brady & Kosofsky, PA. We are always eager to supply education around the benefits of title insurance or other real estate transaction information. Our number one goal is to make real estate simple!
