What is title insurance?
Title insurance helps provide home buyers and/or mortgage lenders protection against losses resulting from unknown defects in the title to your property that existed before the closing of a real estate transaction.
Those unknown “deficits” could be:
- outstanding liens on the property (e.g., unpaid real estate taxes by a prior owner)
- encumbrances (anything that might hinder the owner’s right of ownership; e.g., errors or omissions in deeds)
- undisclosed errors, fraud, forgery, mistakes in examining records
These deficits can result in additional costs in the future or even invalidate a home buyer’s right of ownership in the property. They might also invalidate the lender’s security interest in the policy. Title insurance policies cover the insured party for any covered losses and legal fees that might arise out of such problems.
What does a title company do?
Title insurance companies, also known in the industry as agents, search public records to develop and document the chain of ownership of a property. If any liens or encumbrances are found, the title company might require a home buyer to eliminate them before issuing a title policy. Title insurance agents might also hold money in escrow and perform closing services for an additional fee.
How does title insurance work?
Title insurance policies are indemnity policies that typically protect against losses arising from events that occur before the date of the policy, which is the date of closing. This is different from other types of insurance policies, such as auto or life insurance, which protect against losses resulting from accidents or events that occur after the policy is issued. A title policy is usually paid for with a one-time premium that is handled at the closing of the real estate transaction.
Who needs title insurance?
There are two different main types of title insurance policies: Lenders and owners.
Lenders: If a mortgage is obtained in order to purchase property, nearly all lenders require that a home buyer purchase the lender’s title insurance policy for an amount equal to the loan. A lender’s policy is issued to a mortgage lender. The policy gives the lender protection from covered losses arising from any defects in the title that have become known only after the insured property has been financed. The lender’s insurance policy will remain in effect until the amount financed has been repaid or the property is resold or refinanced.
Owners: Either a home seller or home buyer may buy an owner’s policy. In many areas, sellers pay for owner title policies as part of their obligation in the transfer of title to the home buyer. The question of who pays for the owner’s policy can be negotiated as part of a purchase agreement.
An owner’s policy is issued to a home buyer. It protects the buyer from covered losses arising from any unknown defects in the title that existed before the purchase which become known only after ownership of the property is acquired. Your owner’s policy remains in effect as long as you own or maintain an ownership interest in the insured property.
Who chooses the title company to be used during a sales or refinance transaction?
In a sale Sellers AND Buyers always have the right to choose which title insurance provider is used in a transaction. Sellers and buyers often will rely on their Realtor or Lender who are parties to the home buying transaction to make that decision. It is a gross violation of federal law, as stated above, to require a homeowner to use a particular title insurer. A Seller and Buyer should be made aware of any affiliated business relationship between a Realtor and a particular Title Company or Agent being referred.
Section 9 of the Real Estate Settlement Procedures Act (RESPA) allows for Buyers in a transaction to choose their own title insurer, which does not have to be the same title insurer that the Seller uses. The Seller can only dictate the buyers title insurer if they are paying the entire cost of the insurance. Sellers cannot require a buyer to use a particular insurer, either directly or indirectly, as a condition of sale.
When the Buyer chooses a title insurer independent of that of the Seller, it is called a “split” transaction, and contrary to the understanding of many, it is at NO ADDITIONAL CHARGE to the Buyer. In many states and most of Wisconsin and Minnesota, “split” closing are common and encouraged for the best independent representation possible.
What else should I know?
- Although a title insurance company will most likely be offered to you during the mortgage transaction process, you are not obligated to use it. The seller and buyer can each chose their own title agent/company to represent them.
- Be sure to ask what services and fees are included in the title insurance premium and any fees (e.g., premium, document preparation, closing services, etc.) that may be billed to you separately.
- A lender policy only covers a lender’s loss. It does not protect a home buyer from losses arising from defects in title. Talking with a local, reputable title agent or real estate attorney not involved in the real estate transaction to find out why it may be in your best interest to purchase an owner’s title insurance policy.
- Make sure to ask about any available policy discounts. Premium discounts are available with proof of prior title also know as “reissue” or “substitution” rates.
- Read all title insurance documents you get at closing, including the fine print. Ask questions if any items are unclear; or if any terms, conditions or amounts are not in line with something you may have been told before closing.
- If you believe that a title/closing agent or title company in a real estate closing/settlement transaction is not following standard business practices (e.g., unexpected or undocumented fees, or requesting that you sign documents relating to the real estate or closing transaction that are not accurate), immediately report this to the proper governing agency.
The Consumer Financial Protection Bureau page www.consumerfinance.gov is a good source for additional information about mortgages, real estate and title insurance rules and regulations designed to protect the consumer.