When you’re buying a home, one of the final steps in the process is obtaining the title. A house title represents legal ownership of a property. At closing, the seller of the home transfers ownership rights to the buyer.
Issues with a house title can be costly and stressful. That’s where title insurance becomes important. Title insurance protects against potential financial losses as a result of problems with the title of a property.
Title insurance can protect both the lender and the homebuyer. Unlike traditional insurance, which protects you against future events, title insurance protects you and the lender against claims for past events.
Let’s look at title insurance to understand what it is, why it’s important, and answer some frequently asked questions.
Title insurance can protect either the lender or the borrower. There are two types of title insurance: lender’s title insurance and owner’s title insurance.
Lender’s title insurance is purchased by the borrower (homebuyer) to protect the lender. Most lenders require a borrower to purchase this type of title insurance.
Lender’s title insurance protects the lender in case the seller of the home cannot legally transfer the title of ownership rights. The policy is typically issued after completing a title search, which offers assurance that the title is clear.
Owner’s title insurance is purchased by the seller to protect the buyer. This type of title insurance is usually optional.
Owner’s title insurance protects you if someone makes a claim against the home from an incident that occurred before you purchased it. Common claims come from a previous owner failing to pay taxes or pay contractors for work done on the home.
Title insurance is a type of indemnity insurance that protects lenders and homebuyers from potential financial losses as a result of problems with the title of a property.
Almost all lenders require a borrower or homebuyer to purchase lender’s title insurance. Owner’s title insurance is usually optional, but it’s a smart way to protect against common risks.
When you buy title insurance, the title company searches records to find (and, if possible, fix) several types of ownership issues. First, public records are searched to determine the property’s ownership status. Then, the underwriter determines the insurability of the title.
The cost of lender’s title insurance depends on the price of the home you’re purchasing. It is typically a one-time fee ranging from 0.5% – 1.0% of the home sale price.
The cost of owner’s title insurance depends on the state where you live, the insurance provider you choose, and the price of the home you’re purchasing. It is typically of one-time fee ranging from $500 to $3,500.
The two insurance policies are often purchased in a bundle at closing.
The borrower pays for lender’s title insurance.
In most states, the seller pays for owner’s title insurance.
After completing the property purchase agreement, an escrow or closing agent will initiate the insurance process. At closing, insurance is purchased for a one-time fee.
Traditional insurance protects against future events, but title insurance protects against past events.
Lender’s title insurance protects the lender against potential losses in case the seller cannot legally transfer the title ownership rights.
Owner’s title insurance protects homeowners from risks such as:
Common claims filed against titles include:
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