October 19, 2020
Throughout the homebuying process, you’ll interact with several important housing professionals. Near the end of the process, you’ll encounter a Title Agent, but what exactly is a Title Agent or title insurance, and why do you need them to buy a home?
First, we need to take a step back and talk about property titles. A title is a legal concept that refers to the legal ownership of a home. Not to be confused with a deed, which is legal documentation that proves ownership of a home. When you close on a home, you will receive a deed (signed by both the buyer and the seller) that says you have title to the property.
Titles and the homebuying process
Since titles are part of the legal process of transferring ownership, before the title can be transferred, it must be “cleared” before the buyer can have it. Your lender will coordinate with a title company to handle all title-related processes throughout your home purchase - the buyer is not responsible for finding one. Before closing, the lender or a title company (on the buyer’s side) will run the home’s title in the public record to look for problems like liens, bankruptcies, or unpaid taxes. By declaring a “clean title”, it’s stating that the seller really does own the property and is free to sell it to the buyer.
If the title is clear, then you can move onto closing the home and the title will be transferred to the new owner. The title company will ensure that the deed is recorded with the county’s assessor’s office.
What is title insurance?
Title insurance protects home buyers and mortgage lenders against defects or problems with a title when there is a transfer of property ownership.
As mentioned above, the title insurance company (sometimes an escrow company) runs the home’s title. If any issues do arise during the search, the title insurance company can be responsible for covering it.
Sometimes, even if the title is cleared, issues can come to the surface after the fact, even years later. Even the most diligent title professionals may not find all problems associated with a home. Some risks, such as title issues due to filing errors, forgeries, or undisclosed heirs, are difficult to identify and can come up after closing.
In rare cases such as these, title insurance protects the new owner and the lender from costly issues. An example from a title company in Virginia reported that a home was backed up to railroad tracks and should have had an easement noted in the property description (a clause stating that part of the property can be used without your consent, like utilities or public transportation). However, an easement was not originally listed and the property can’t sell in the future without a correction to the deed, which costs tens of thousands of dollars. If this sort of issue is uncovered after the home sale, the new owner is responsible for it and title insurance would cover that, instead of paying out of pocket. For more examples of issues that title insurance can prevent, check out this article from Realtor.com.
There are two types of title insurance policies: an owner’s policy and a lender’s policy and they respect each party exclusively, respectively.
Lender or mortgage title insurance protects the lender as security for providing a loan to a buyer. It does not protect the buyer. Owner's title insurance protects the buyer and lasts as long as you (or your heirs) have an interest in the insured property. This may even be after you have sold the property.
Is Title Insurance Necessary During a Refinance?
Many of you may be refinancing right now and wondering, do I need to pay for title insurance again if I’m refinancing my home?
During a refinance, your home isn’t changing hands, so a new title owner’s insurance policy is unnecessary - your originally purchased policy is still active. However, whenever there’s a lender involved (like a refinance), title lender’s insurance is required.
Even if it’s the same lender, you’ll still need to purchase a new title lender’s insurance. Under the terms of a refinance, the original mortgage loan is paid off and a new refinance loan is originated. When the original loan is “paid off”, the title lender’s policy goes with it.
While you may not have anticipated the additional cost of a title insurance policy, it is a necessary requirement of the refinance process. Be sure to talk to your lender if you have any questions and to have them walk you through the process.