There is a great deal of risk when you buy a home. Any number of things could go wrong, including legal claims regarding whether you are the rightful owner. Since you probably purchased the house with the help of a home loan, the lender is at risk, too. The bank or credit union gave you a great deal of money to purchase the property. If it turns out you did not receive clean title to the property, your lender risks you losing the house and not being able to pay back the loan. That is why both you and the lender obtain title insurance – to protect yourselves from potential legal claims.
Understanding the Term "Title"
When you buy a home, you receive title to the property. Title is a legal concept denoting who has a right to possess and control something. When you buy real estate, you receive title and are entitled to do what you want with the land and house (within the law). Having title also means you can transfer the property. You can give it to someone or sell it. You must have title to the property to give it away or sell it.
You may have also heard the word “deed” thrown around when discussing buying a home. Title is the legal concept of ownership. The deed is the written legal document that transfers title from the previous owner to you. Deeds should be accurate and recorded in the property’s county.
Potential Problems With Title
You can have legal claims against your newly acquired title for a few reasons. One potential problem is if there are previously undisclosed owners of the house. This can be a problem if the previous owner of the home passed away and there were heirs that had a legal claim on the house, despite it being sold to you. In a worst case scenario, those heirs may try to get the house back.
There could be a lien on the title if the previous owner failed to pay state or local property taxes. Now that you own the house, you may need to bring those taxes up to date. Or, a contractor may have worked on the house and not been paid by the previous owners. That contractor could have put a construction lien on the title. If the contractor was not paid from the sale, the business could come after you for payment.
Other title problems could be due to previous forgeries, mistakes or omissions on the deed.
Protecting Your Title and Your Lender
There are two ways to protect the title of your new home: a homeowner’s title insurance policy and a lender’s title insurance policy. A lender’s policy is often required when obtaining a mortgage. You must buy this type of policy to protect the lender in case someone makes a legal claim against the property. However, a lender’s policy does not protect you – just the bank or credit union. If you want to protect your own finances in case of a legal claim, you need to purchase an owner’s title insurance policy.
For a standard home, you will pay anywhere from $400 to nearly $800 in 2018. The average cost for a lender’s title insurance policy in 2018 is $544. Adding in your own title insurance policy, the average is $1,374. This is a one-time fee paid when you purchase a home. However, the amount you pay depends on various factors such as the location of your home, the mortgage amount and your credit score.
You may be required to purchase a title insurance policy to protect your mortgage lender from any legal claims against the title to your newly purchased property.