Buying a new home involves investigations into the property to ensure that the home's condition, the property, and other significant factors are acceptable. But certain facts about a home or a piece of land may be difficult and even impossible to discern, such as fraud on a property's previous mortgage or title deed. This is where title insurance comes in. Title insurance protects you against claims and errors related to ownership or the title deed, which occurred prior to your purchase, but came to light afterward.
Title Insurance and Real Estate
When you purchase a home with a mortgage, your lender requires you to purchase a title insurance policy called a lender's policy. This policy protects the lender's financial interest in your home up to the amount of your mortgage, should a title claim arise. Since the mortgage amount is often less than the home's sale price or its value – due to your down payment contribution – a lender's policy doesn't cover the full amount of a home's cost or value.
An owner's policy covers more than the loan amount. It protects your interests in the event of an adverse claim by paying the legal fees to establish a clean title. Cash buyers who do not need a mortgage do not purchase a lender's policy, but usually do purchase an owner's policy for their own protection.
Title Insurance Costs and Premiums
You pay the cost for title insurance only once, and the coverage continues as long as you hold title, and even after you sell the home. At closing, your share of the title fee – or premium – for the lender and owner's policies are paid through your settlement fees, also known as closing costs. The cost of title insurance typically varies based on the home price and the state you live in, and can range from several hundred dollars to several thousand. The national average premium was $1,000 at the time of publication. The title examination or search, as well as any title defect that is discovered before you close, can affect the cost.
The title company conducts a search or examination of public records to discover any liens or encumbrances – also known as clouds – to title, prior to issuing a policy. This search may not uncover all title defects. That is why prudent homebuyers purchase an owner's policy to cover any title defects that may come up in the future.
Certain states, such as Florida and Texas, set fixed title rates which are the same for all homebuyers. In California and New Mexico, premiums are not fixed by the government and homebuyers can shop around for the best title insurance premium. The state of Iowa underwrites title insurance policies itself, and therefore has the lowest rates in the country of $110 for home prices up to $500,000.
Coverage and Limitations
A standard coverage title insurance policy covers you against any defects that are detectable during a title search or examination. An extended coverage policy protects you against title defects that are off-record, or otherwise not found during the title search. Standard coverage protects against issues such as unpaid taxes and assessments or defects due to lack of access to an open street. Extended coverage protects against defects, liens, encumbrances, easements, encroachments and conflicts related to boundary lines, that may not be reflected in the public records. Extended coverage also requires a survey of the property before issuing insurance.