Most people are familiar with the concept of insurance. Whether it’s home, health, or car insurance, nearly everyone has at least one policy. But what about title insurance? Not everyone has this type of policy or even knows what it is. However, anyone who plans on buying a house should become familiar with it.
So, what is title insurance, and how does it help buyers? If you work in real estate and have clients who are buying a house, you need to help them understand what to expect.
What Is Title Insurance?
The goal of this policy is supposed to protect both lenders and home buyers from purchasing a house that doesn’t have a clear title. If it turns out the title is bad, the buyer cannot legally be considered the owner—meaning they will lose a lot of money on a bad investment. This would also be bad news for the lender, as they won’t sell the house if the buyer defaults on the loan.
A title agency typically performs a title search during the home buying process. This checks for any title issues that could stop the buyer from purchasing the house, as a title defect would mean someone else still owns it. In that case, the property can’t be sold until the fault is identified and fixed.
So, while a title search can help identify title defects before closing day, some title issues still slip through the cracks and are not found until the buyer has already moved into their new home. Finding out you don’t have legal rights to the property you’re already paying on can be devastating. This is why title insurance is imperative, as this policy can help pay for any financial damages if it turns out there’s a title defect.
What Are Examples of Title Defects?
Now you know title insurance is necessary if there are title defects, but what exactly does that mean? In general, a title defect occurs when there’s a dispute about who owns the house.
For example, the home may be caught up in the middle of a conflicting will. In that case, one person might claim they own the house and may be preparing to sell it to your client. But if a family member of that person disputes it—and claims they get the house according to the will—the home cannot be available to sell until the dispute is settled. A title search might not find this issue right away, but if it’s eventually discovered that someone else claims the house’s title, it will be helpful for your client to have this insurance.
Other examples of common title defects include:
- Outstanding lawsuits
- Liens against the house
- Back taxes owed by the seller
- Bankruptcy
- Forgery or fraud
If your client discovers these or other title defects on a new property, the policy will protect their financial interests up to the mortgage amount. This is why having title insurance is well worth the policy’s price.
What Are the Two Types?
If you’re going to recommend title insurance to your clients, make sure they know their options first: lender’s title insurance and owner’s insurance.
Lender’s Title Insurance
Simply put, lender’s title insurance protects the lender from financial damages that may occur due to title defects. So, if it turns out your client does not legally own the home, they stop paying on the mortgage. As a result, the lender’s policy will kick in to cover the total of the mortgage so the bank doesn’t lose any money.
However, in that case, your client—the home buyer—would not be compensated for money already paid for the home once they stop paying for it. The money from the policy would go to the lender, as lender’s title insurance only covers the bank and not the buyer. This is why lenders require buyers to get this type of title insurance. But buyers can protect themselves by also getting owner’s title insurance.
Owner’s Title Insurance
The other type of title insurance protects homeowners. As such, it’s not required, but it’s highly recommended. This is because if the title agency discovers title defects on the house, the owner will be compensated for up to the amount of the mortgage.
This allows the owner to afford to buy a different home if it turns out someone else legally owns the one they purchased. Owner’s title insurance protects your client’s investment, so you should encourage them to get this policy when buying a house.
How Much Does it Cost?
Buying a house requires a significant investment, so it’s understandable if your clients are concerned about spending extra money. But it’s good to remind them that lender’s title insurance is required. As a result, they’ll need to include that in their budget for closing costs, which add up to about 3% to 6% of their home’s purchase price, according to Investopedia. You should also let them know that owner’s title insurance can save them a lot of money if there are title defects in the future.
Another way to encourage your clients to get title insurance is to give them an idea of what they’ll likely pay so they can budget ahead of time. The cost of title insurance varies depending on the state, home loan amount, and title agency. But in general, NextAdvisor reports that it’s approximately 0.5% to 1% of the purchase price. According to Forbes, this results in an average range of $1,500 to $3,000 on a home worth $300,000.
Speaking of paying closing costs, you can reduce your clients’ stress and confusion over what and how to deliver at closing by making the payment process easy. Using a secure digital payment platform like paymints.io is a good start. Contact us to schedule a demo to find out how paymints.io can make closing better for buyers!
