Title insurance is a type of insurance that protects mortgage lenders and homeowners against claims questioning the legal ownership of a home or property. If disputes over title ownership arise after the purchase, the insurance policy pays for any legal fees to resolve them.
Unlike other types of insurance that help cover future mishaps, title insurance is designed to protect the policyholder from any past title discrepancies. For instance, when you buy car insurance, you are protected in case your car is in an accident. When you buy health insurance, you are protected against the cost of future medical care. Title insurance, on the other hand, protects an investment in real estate that might be at risk due to a past event, such as an undiscovered lien against the property.
Title insurance does not just protect you, as a purchaser of the property. Your mortgage lender will likely require you to have title insurance in order to protect their security interest in the property you are buying.
In any real estate transaction requiring a mortgage, the title company runs a public record search to ensure that the home being purchased is free and clear of any liens or ownership disputes. This process confirms the seller’s legal right to sell the home. If any defects in title, also known as “clouds”, are found during the title search, they are the responsibility of the seller. He or she may be able to cure the defects, or you can walk away during the sale. If defects in title are missed, however, you could be on the hook.
For example, a lien travels with the property, not the debtor. For example, let’s say a previous owner of your house had the kitchen remodeled. He failed to pay the contractor the $30,000 owed, and the contractor had a lien against the house for that amount.
If the title search failed to discover the lien, and you purchased the property, the lien would become your problem. Now that it is known, you will have to satisfy it, most likely out of the proceeds of the house if and when you sell it.
While this process usually goes smoothly, title insurance comes into play when disputes arise. Here are some of the more common title issues:
- Title forgeries
- Back taxes
- Filing errors
- Unknown heirs to the estate who claim ownership
- Inconsistent or conflicting wills
- Liens, commonly from unpaid home equity lines of credit (HELOCs) or contractor bills
- Undocumented easements
There are two types of title policy; a Lender’s policy and an Owner’s policy.
A lender’s title policy is designed to protect the financial institution providing your mortgage from title claims that would put their stake in your home at risk. Lenders almost always require borrowers to purchase title insurance on the lender’s behalf as part of the loan-approval process. It’s considered a closing cost.
The owner’s title policy is designed to protect the homeowner in case of any claims against their ownership of the home. In most cases, owner’s title insurance is not required in a home purchase, but it is recommended. It can be paid for by the seller at closing, so you may want to negotiate for it when you are purchasing a home. Generally, in Michigan, the seller’s real estate agent will choose the Title Company that will provide the buyer’s owner’s policy and that Title Company will conduct the closing. The buyer may use the same Title Company for the Lenders policy, or the buyer can use a different Title Company.
If you are buying a home in cash or your lender doesn’t require title insurance, you can request that the seller provide a warranty of title, which states that they are the sole party with a right to sell the home.
How much does title insurance cost?
Title insurance policy costs often range between $500 and $3,500 for each policy but vary based on the purchase price, mortgage amount, the sales price of the home, and the extent of the coverage.
Your title insurance premium is a one-time charge that’s paid at closing. In addition to the insurance itself, you may be responsible for other related fees, like wire transfer fees, closing fees, and recording with the county (register of deeds).
You should watch out for unnecessary fees from title companies. Anything outside of the title premium, title closing, recording, and wire transfer are unnecessary fees that you should NOT be paying.
In many states, you can compare the prices of different title insurance companies. But in Michigan all title companies are required to provide the same level of coverage at the same price, so shopping around isn’t required in terms of title premiums.
I hope you found this information informative and helpful. If you have any real estate related questions, I am always happy to talk with you, and I’m available via phone, text, email and social media.
To your health and happiness, Dani