What is Title Insurance?
From contract contingencies to encumbrances, the home sale and purchase processes bring with them a new vocabulary. One of the processes that most first-timers find confusing is the title company’s role in a real estate transaction. Let’s try to clear up the confusion.
A title company serves two main functions in the real estate transaction. Its first role is that of facilitator for the closing. A title company manages the numbers, works up the settlement structures, and disburses the funds from the escrow account at closing.
Performing a title search and issuing a title insurance policy is a title company’s second function. When you borrow money, the lender requires that you buy a lender’s title insurance policy.
From Rocket Mortgage: "Title insurance is a type of insurance policy 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 and conflicting wills."
Before issuing this insurance, a title company will ensure that the seller has the legal right to transfer the title to you, and that the property isn’t subject to any tax liens, special assessments, or mechanic’s liens. Then, they will issue the lender’s title insurance policy which covers the lender in the event of future claims against the property, for the life of the loan. Although you pay for it, the lender is the only party to benefit from the insurance should there be a claim.
Title companies also issue owner’s title insurance policies, which, as the name implies, covers the new homeowner’s interests for as long as they own the property. While this policy isn’t mandatory, “The majority of people do tend to buy it because it protects the home purchase, which is usually your largest bank transaction,” says Gerry Glombicki, director of insurance at Fitch Ratings.
Both lender and owner’s policies are one-time expenses, rolled into the closing costs. The cost of the lender’s policy is based on the amount borrowed, whereas the cost of the owner’s policy is based on the home’s value.
If you fell asleep while reading this article, that’s okay – I’m here to help! Don’t hesitate to reach out if you have any questions about the title process.