Like all insurance, title insurance is about peace of mind. But do you really understand the importance of this insurance? This isn’t a policy that asks you to pay premiums for protection against unforeseen future risks. Instead, it’s a one-time fee that actually saves you from financial loss in case of unknown errors that could have happened in the past!
What is Title Insurance?
When a property is financed, purchased, or sold, a record of that transaction goes into the register — likely at the county records office. But this isn’t the only information recorded. Liens, levies, and other events that affect property ownership are also available.
Before a property closes, your title company will do a title search. Title professionals search these public records to find any ownership issues before the final sale, but even the best ones can’t always find them all! Filing errors, forgeries, and undisclosed heirs are just some of the examples of risks that it can be possible for a title company to miss.
Title Insurance is protection from these and other issues that may be discovered later.
How Does Title Insurance Protect?
Title companies research the entire history of ownership on a property to discover any possible fraud and determine whether anyone else could possibly have a legitimate claim. This includes paper records dating back decades, or even centuries.
Without this insurance, you cannot be sure that your claim on a property has priority over someone else’s, which is of vital importance to both you and your lender.
Title insurance is rarely used, but appreciated when it is needed! An estimated 4-5% of titled insureds have been paid on their policy, which was needed for instances like covering the costs of paying off a previously undiscovered lien or defending against a lawsuit filed against by someone claiming a right to the property. This type of insurance can also provide a cash settlement if a property is purchased with a forged deed from a fraudulent seller who did not actually own the home. That said, it does not protect against eminent domain, which is when a government seizes private property for an ostensibly public purpose.
Who Should Get Title Insurance?
Owner’s Title Insurance
The homebuyer isn’t actually the only party that may be interested in considering title insurance.
Owner’s title insurance obviously protects the new buyer. Purchasing a property is a big investment, and no one wants to find out after the fact that there may be underlying issues that could prevent them from selling their property cleanly in the future. In the rare case that title errors or defects were missed during the title search, owner’s title insurance offers financial protection for future expenses related to the issue.
After such a large investment, no one wants to discover after the transaction there are old or unpaid liens from the previous owner on the property, which would prevent the new buyer from selling the property cleanly down the line. If title defects are missed during the title search, title insurance provides financial protection for expenses related to the issue.
An owner’s title insurance policy protects the homebuyer. The coverage amount is usually equal to the purchase price and remains constant for as long as the buyer or their heirs own the home. This type of policy is not required, but is recommended, and only needs to be purchased once.
Lender’s Title Insurance
Some mortgage lenders also prefer— or even require — title insurance to protect the property, because it is, in fact, their investment as well! Lender’s title insurance, also sometimes called a loan policy, protects the lender from title defects, fraud, or prior liens that could prevent the mortgage from being valid and enforceable against the property. It also ensures that the lender has the first claim to the property in the event of a default or foreclosure.
Lender’s title insurance helps ensure the mortgage will not be hampered by unknown encumbrances. This includes liens, of course, but also easements, zoning laws, restrictive covenants imposed by homeowners associations and leaseholder rights.
Major mortgage investors Fannie Mae and Freddie Mac, as well as many others, require lender’s title insurance. But while the owner’s policy is usually set at the amount of the home’s purchase price, the lender’s insurance policy is usually only the amount of the mortgage principal (loan amount) on the home.
How Much is Title Insurance?
In Virginia, the cost of title insurance is set at one percent (or $1.00/$1,000) of the transaction amount. In our Northern Virginia region, an additional grantor’s tax is levied. This grantor’s tax adds $0.15 per $100 (or portion of $100) of the sales price or fair market value of the property, excluding any liens or encumbrances.