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At some point during your home buying process, the topic of title insurance is likely to come up. As with most types of insurance, title insurance is better to have and not use than to be needed and unavailable. But what is it, why do you need it and how does it work?
Title insurance is a specialized insurance policy that protects you and your mortgage lender against mistakes made in a title search. If you find a home and there's not a clear title to it, title insurance protects the bank - and you - if there's a problem. A clear title means you'll be able to occupy and use the property the way you want, and that you're able to sell or pledge your property as security for a loan.
There are generally two types of title insurance: lender's and owner's title insurance. The lender's policy is usually based on the dollar amount of your loan and protects the lender's interests in the property against a problem with the title. The policy coverage decreases each year and goes away as the loan is paid off.
As its name suggests, the homeowner buys owner's title insurance, which is in the amount of the real estate purchase, for a one-time fee at closing. It lasts as long as you own or have an interest in the property. Owner's title insurance fully protects the homeowner in the event that there's a problem with the title that wasn't discovered during the title search. This type of insurance also pays for any legal fees involved in defending a claim to your title. Think of owner's title insurance as helping to protect your equity, or your investment, in a home.
Title insurance is a safeguard against loss arising from hazards and defects already existing in the title. While claims on title insurance are rare compared to other types of insurance, they still happen and can be complicated legal issues to fix.
For example, one of the most common title-insurance claims is for the cost of back property taxes that the title company missed in researching a sale. Another example is when there's not a clear title to the house, especially in cases of divorce. These scenarios might sound minor, but they can cost thousands in fees without title insurance.
Are you buying a newly built home and think there's a clear title? Many consumers think they're the first owner if they're building a home on a lot, but it's just as likely there were prior owners of the land. A title search will uncover any existing liens, and a survey can determine the boundaries of the property you're buying.
The cost of title insurance depends on the value of your property. In Texas, title-insurance rates are set by theTexas Department of Insurance. Even so, there are a few considerations to take into account that could affect how much you pay and what type of coverage you receive:
Take advantage of being a buyer. If you're purchasing a property in a buyer's market or buying a previously owned home, you can negotiate with the seller to purchase your coverage.
Ask about inflation coverage. In the case of owner's coverage, adding inflation coverage means that as the value of your home increases, the value of your title coverage increases as well.
Ask about extended coverage. Title-insurance policies may exclude coverage in the event of lot-line debates, unrecorded mechanics liens, and easement problems.
Danny Frank of Prudential Anderson Properties is the 2013 chairman of the Houston Association of Realtors.
Danny Frank
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