Title insurance is an insurance policy that protects the property buyer from financial loss due to defects in a title to a property.
According to the escrow agents from Riverside Abstract, a title insurance company, the lender’s insurance is the most common type of title insurance. With this type of insurance, purchased by the borrower, the lender is protected.
Another type of title insurance is the owner's title insurance, which is available separately. It is purchased by the seller in order to protect the buyer’s equity in the property.
BREAKING DOWN 'Title Insurance'
With the title insurance, both real estate owners and lenders are protected against loss or damage occurring from liens, encumbrances, or defects in the title or actual ownership of a property.
The title insurance protects against issues with past occurrences, unlike traditional insurance, which protects against future events.
From the title insurance agency, point out that those issues include property ownership by another person, fraud or forgery of the title documents, unidentified easements, outstanding lawsuits, liens against the property, etc.
Purchasing Title Insurance
Upon completion of the property purchase agreement, the insurance process is initiated by an escrow or closing agent.
According to Riverside Abstract, there are five major U.S. title insurance underwriters, of which the agent or attorney typically recommends one.
There are two types of title insurance: lenders' insurance and owners' insurance. In the case scenario, the seller was not legally able to transfer the title of ownership rights, in order the lender to be protected, the borrower is required to purchase a lender's title insurance policy. This is required by almost all lenders.
A lender's policy only protects the lender against loss and it involves completion of a title search, offering some assurance to the buyer.
However, title searches are not infallible and the owner remains at risk of loss. This generates the need for additional protection in the form of an owner's title insurance policy. This type of insurance, purchased by the seller is optional.
From Riverside Abstract, which has a number of successful closings in its portfolio, point out that in order to be guaranteed that everyone’s rights are adequately protected, a lender's policy and an owner's policy are required together.
Title insurance is purchased at closing from both parties for a one-time fee.
Requiring purchase from a specific title insurance carrier by the sellers is prohibited by the Real Estate Settlement Procedures Act (RESPA) in order to prevent abuse.
Risks of No Title Insurance
In a situation a title defect is present, having no title insurance exposes transacting parties to significant risk. For example, a home buyer, purchasing the house of its dreams, after closing finds out unpaid property taxes from the prior owner. Without the title insurance, the owner inherits the unpaid taxes from the prior owner. Riverside’s escrow agents explain that the title insurance has a cover that protects the buyer as long as he owns or has interest in the property. For more information, visit Riverside's profile on Active Rain.