Whether you’re buying your first home or are refinancing your fifth, the lending industry is notorious for its “insider lingo” that makes understanding the mortgage process seem like a daunting task. You’ve got Good Faith Estimates, HUD-1 statements, debt to income ratios, origination fees, points, private mortgage insurance, closing costs … the list goes on.
While we won’t be digging into each of these terms in today’s blog, we do want to tackle the concept of title insurance.
The choices you make around buying and financing property are some of the biggest you will make in your lifetime. It’s important that you protect your investment and give yourself peace of mind. That’s where title insurance comes in handy.
What would happen if there was an issue with your title and someone else tried to claim it as their own? You rely on the experience and knowledge of the attorney or title examiner to point out any issues with the title prior to closing, yet - unfortunately - some of these issues can be hidden and could sneak up and cause problems in the future.
It Starts With the Title Search
When you purchase a home, the lender or attorney will request a title examiner to perform a title search for closing. A title search gives a history of the property including its previous owners and, depending on your state, the required search period could range between 40 and 70 years. The examiner would head to the local courthouse and perform the search and pull copies of applicable documents.
It will also provide the current tax status, any outstanding mortgages, and any open liens which would need to be addressed at closing. The title search will also provide insight into any applicable easements, right of way agreements, restrictions, or covenants which would affect the property.
To sum it up, the title search will let you know if the seller has a saleable interest in the property, if there are any restrictions or allowances to use the land, and what liens should be paid off at closing. By having all of this information, purchasers and borrowers are better able to make informed decisions about their purchase.
For those looking to refinance, the title search can also provide information that may have been missed at closing, such as an old open mortgage, or if a lien was placed on the property mistakenly.
What is Title Insurance?
Title insurance is protection for purchasers and lenders against any property loss or damage due to defects in the title. Defects would include another person claiming ownership in the property, document forgery, fraud, liens, encroachments, and many other issues which would affect having clear title to the property.
Lender’s Title Insurance
There are two types of title insurance policies. The first one is a lender’s title insurance loan policy and is based on the amount of your loan. In most cases, once a lender buys your loan, they will immediately sell it to the secondary market and this can take place before you’ve even made your first payment on your loan. In order for the lender to protect its security interest in your loan, most secondary investors require that the loan has title insurance coverage. This comes by way of the lender’s title insurance loan policy. The lender’s policy expires once the loan has been paid in full and satisfied. You will likely be required to purchase lender’s title insurance each time you refinance or buy a new home.
While most lenders will require a lender’s title insurance policy to be purchased with every loan, a common misconception is that the lender’s title insurance loan policy will also protect the owner of the property against any title issues. The fact is - it doesn’t! In order for an owner to get their own protection, they will need to purchase an owner’s title insurance policy.
Owner’s Title Insurance
The other type of title insurance is called an owner’s title insurance policy. Unlike the lender’s title insurance policy, an owner’s policy protects the owner and is valid for as long as the current owner holds title to the property. Depending on the cost of the home, the price for owner’s title insurance varies, but the purchaser can save some money by purchasing a simultaneous policy (lender’s and owner’s) for the same closing and get a discounted premium on the cost of the owner’s title insurance policy.
Similar to car insurance or home insurance, which protects you if you were to get into a car accident or if your house burned down, title insurance does the same, but it protects your title to your home against any issues that might arise from previous owners or events.
Unlike the other types of insurance, owner’s title insurance is paid in the form of a one-time premium at closing, and protects you against any issues for as long as you own the property. Owner’s coverage is not transferrable if you decide to sell your home to a new owner. The new owner will be given the option to purchase their own policy if they want to be protected and their closing.
Won’t the title search tell me if there are any issues?
While a title search is performed by the attorney and title examiner on each property they close, there are many issues which may arise that cannot be foreseen by the search or the attorney. The only way to truly protect your interest is by purchasing Owner’s title insurance.
The title search does provide a lot of information that is important to the history of the property, however there are many instances in which the title search may not be able to provide insight. Possible title problems which may be hidden include:
- any mistakes while examining the records
- undisclosed heirs
- errors or omissions in deeds
- conflicting wills
An owner’s title insurance policy would protect you if an issue arises that is covered by your policy and would pay for your legal fees should you have to fight for your title in court.
Title Insurance and Refinancing Your Home
For homeowners considering a refinance, you’ll need to purchase lender’s title insurance, as lenders won’t fund your mortgage without it. Choosing to purchase an owner’s title insurance policy is optional.
It should be noted that in some markets it is customary for the home seller to split the cost of title insurance with the buyer so that title insurance and escrow charges are easier to swallow. So, when you refinance and have no one to split these costs with, it can seem like you’re paying more for the title insurance on a refinance. That’s really not the case.
Have questions about refinancing and the costs involved? Our team at Lenda is making refinancing easy, and is always available for consultation. In fact, Lenda clients shave off an average of $409 a month from their monthly mortgage payment. Get a quote in less than two minutes and see how much you could save!