Mortgage lenders require title insurance, and for good reason. Title insurance protects your investment (and theirs) and your ownership of the home.
Why Title Insurance is Worth the Cost
What if, after closing, an individual contacted you and said, “My grandma used to live in that house and I am an heir to the property. Sorry to inform you, but I actually own this home, and I never authorized it to be sold.”
What if a roofing contractor said he was never paid for his work and you find out there is a lien, and now you are being sued in court for payment of the roof over your head?
What if a previous owner got a divorce and the ex-spouse is now suing for his or her half of ownership?
What if another individual somewhere in the country has your same name, and that person owes an attorney tens of thousands of dollars, and now that attorney has placed a lien on every person they can find with that name?
All of these scenarios have happened, and you might be surprised at how often. Title problems occur in more than a third of residential real estate transactions, according to Ticor Title.
These are only a few of a myriad of things that could cost you big without title insurance to protect your good name and ownership.
The good news is that title insurance is a one-time fee paid at closing. There is no monthly bill and yet the insurance protects you as long as you own the property — and it extends to your heirs. However, if you refinance, you will need to buy another title search and policy due to having a new mortgage loan.
It’s easy to see why a mortgage lender won’t invest hundreds of thousands of dollars in a home without the safety of title insurance.
What if you pay cash? Is title insurance required then?
No, title insurance is optional. But knowing the pitfalls, who would be foolish enough to forego this protection?
If you pay cash and didn’t buy title insurance, can you add it later?
No, the only time you can buy title insurance is at closing. This is when the insurance company searches the history and clears any false liens, judgments, errors, fraudulent claims, etc.
So, when you see that seemingly large fee on your Closing Disclosure, go ahead and smile, because title insurance is keeping you safe from so many financial nightmares.
There are two types of title insurance. Simply explained:
Lender’s Title Insurance protects the lender’s money they are loaning to you. If a previous owner fails to pay taxes or other obligation, the creditor may file a lien against the property. If the previous owner has an heir who says they own a piece of the property, that could be a problem. If someone with the same name or a similar name as yours owes for back taxes, child support, has a bankruptcy, or other financial mishap, that person’s lien might get attached to your property. (It happens fairly often, especially if you have a common name.)
Lender’s Title Insurance protects the money the lender has put out for your house. As you pay down the loan, the amount of protection is reduced accordingly. When the loan is paid off, the lender’s title insurance is finished and over.
So at the point when you have complete equity in the house, lender’s title insurance no longer exists. Lender’s title insurance does not protect your equity.
Owner’s Title Insurance protects you, the new home owner. It protects your equity in the home against false liens and judgments, false and undisclosed heirs, forgery and fraud, errors and omissions.
In some states, the home buyer pays for both title insurance fees unless otherwise stated in the Purchase Agreement. In the West where I do loans (California and Washington states), the current owner/seller pays for your owner’s title insurance; and you pay for the lender’s title insurance. Since the Owner’s Title Insurance is more expensive, this is good for you, the home buyer.
As you can tell, both types of title insurance are important. I do not know of any lender that does not require Lender’s Title Insurance. I do not know of any home buyers who have been too foolish to protect their precious home equity with Owner’s Title Insurance.
So no, title insurance is not a rip-off. What is a rip-off is when title insurance companies over-charge and add a boatload of junk fees. Unfortunately, that happens a lot, and I have taken a public stand against it! As a home buyer, it is YOUR LEGAL RIGHT to shop and choose the title insurance company. It is not the right of the real estate agent nor the seller to choose; nor do they have the legal right to bully you into using the services of a title company you do not want. If you are getting coerced or pressured, please send me an email with all the details, including the name of the companies here.
I hope this information helps, and thank you for subscribing to my blog.