Homeownership is one of the biggest financial commitments that most people will ever make. You’ve probably heard of title insurance, but is it really necessary? If you are applying for a mortgage, your mortgage lender will most likely require title insurance. But even if it’s not required, title insurance offers clear benefits for new homeowners.
Do I really need title insurance?
When you’re ready to buy a home, you’ll want to protect your investment in every way that you can. And if you have a mortgage, your mortgage lender will most likely require different types of insurance since your home is collateral for your loan.
This is where title insurance comes in. Title companies verify the legal history of your home and make sure your new home has a clear title free from liens, outstanding debts, and public ownership claims.
During the transfer of ownership, you don’t want to be surprised by legal problems that show up, such as back taxes, ownership disputes, forged titles, or outstanding debt.
Title insurance is specifically designed to protect both you and your mortgage lender from any disputes over the ownership of your new home. If a dispute does come up, the title company works on your behalf to clear the claims and verify home ownership. If there are fees during the process, the title company would be responsible for paying those fees.
Without title insurance, you’d need to face the battle on your own and pay any fees that could be required.
What kind of policy is best for me and my home?
There are two primary types of title insurance policies: one policy for the mortgage lender and one policy for the homeowner.
When you apply for a mortgage to purchase your home, the mortgage lender will very likely require title insurance. This protects them from financial complications associated with any title disputes or other ownership complications. If you pay cash for a home or do not have a mortgage, then you will not be obligated to purchase a policy specifically for the mortgage lender.
The title insurance policy for the homeowner protects you and anyone listed on the title or deed to the home. This policy is usually not mandatory but will protect you from legal and financial disputes. This is even true if the seller presents the warranty deed, confirming the title is clear. Despite this presumed protection, anything can happen.
What are my coverage options for title insurance?
After purchasing your home, title insurance can offer protection against common disputes if any issues come up. These are common situations that a new policy covers:
- Deeds that have been altered or forged
- Fraudulent claims
- Outstanding tax liens or other debts
- Encroachments or property line disputes
- Family members who may lay claim to claim the home
How do I buy title insurance?
Your local mortgage advisor or real estate agent will most likely suggest a title insurance company. Since your local mortgage advisor works with thousands of home loans every year, it’s a wise move to follow their direction. That said, the choice is ultimately yours. Before you sign, you can always talk with your mortgage advisor about recommendations and research title companies.
Before offering you a policy, a title company will perform a title search, which is a process that searches for outstanding debts, loans, or ownership complications. This ensures that the seller has clear ownership of the title and has a right to sell the property.
Once the title company has completed its research, it will offer a quote based on its findings. However, the title company may decline to offer a policy if the property is considered high risk.
In the rare instance that title insurance is declined, your mortgage advisor can help you through the process and discuss your options. Your real estate agent is another partner that will be very helpful.
Is title insurance included in closing costs?
Typically, title companies charge 0.5% to 1% of the home’s final sale price, and it’s due at closing. However, this number can vary from state to state. Other risk factors could also influence the cost of the policy, such as the home’s age and the property’s legal history.
Total closing costs run anywhere from 2-5% of the home loan amount and typically include title insurance, appraisal fees, property taxes, loan origination fees, and other items.
If you’d rather not pay your closing costs out of pocket, schedule a time to talk with a local mortgage advisor about possible options
When you’re ready to buy a home and apply for a mortgage, title insurance will keep you and your home protected. Getting pre-approved for a mortgage is the best first step you can take when you’re shopping for your next home. Connect with a local mortgage advisor to discuss your loan options and save money on your mortgage. We’d love to help.