What is Owner’s Title Insurance?

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When you spend most of your life savings on the purchase of a house, you will not want to deal with other people claiming they have an ownership stake in it. Owner’s title insurance protects you against these third party claims, that can show up even after years that you have owned the house. While you are not required to purchase owner’s title insurance, it is an expense that will give you some peace of mind down the road.

What You Should Know

  • Owner’s title insurance protects the buyer of a house against claims on the ownership of the house by third parties
  • Lender’s title insurance protects the lender in the case that the borrower defaults on their mortgage by giving priority to the lender’s claim on the house
  • Owner’s title insurance is optional while lender’s title insurance is required by most lenders
  • Common problems in a house’s title include liens, easements, encumbrances, errors in the public records, and forgery.
  • Some of the biggest national title insurance companies include First American, Fidelity Title Insurance, and Chicago Title Insurance company.

What is Title Search and Title Insurance?

When you get a mortgage to purchase a home, lenders require a title search on the property, which is performed by a title company. The company searches the public records that exist on a house’s property and looks if there are any defects on the documents. If there are, the defects on the title ownership must be fixed. The title search serves to find out if there is any other party other than the buyer and seller that may have an ownership stake in the house. These can range from contractors that have performed work in the house and claim to have not been paid by previous owners, an heir of a prior owner, a tax authority, or others.

In some cases, defects in the home’s title may not be revealed by the title search and they may bring issues in the future. This is where title insurance comes in. Owners’ title insurance serves to protect the buyer of a home on the occasion when a party that has dealt with previous owners comes claiming ownership. It can happen that the previous owners themselves were not aware of the claim of other parties to ownership or the parties themselves may discover this later on.

Common Title Defects

During the title search of a house, the title company will look for any defects in the house’s title that may affect the title ownership of the new buyer. In turn, title insurance will protect you in the future if the defects are not uncovered by the title search. These defects can include:

  • Other parties’ ownership stake in the house
  • Liens - These are debts to parties such as a tax authority, a lender, or a contractor that a previous owner may owe them. The parties can claim that they have an ownership stake in the house’s title since they were never paid. As a buyer, you would want to immediately resolve this as you may be stuck having to pay other owners’ debts.
  • Easements - These are legal rights that a person or a group of people can have in using somebody else’s property for a particular reason. While different parties may hold easements against your property to access it, they do not have any ownership stake in the property. It is a good idea to check for any easements on the property as they may largely affect your enjoyment of it.
  • Encumbrances - Besides liens and easements, encumbrances also include zoning laws, restrictive covenants, and leaseholder rights. Zoning laws by local authorities can restrict how you use your property. Similarly, restrictive covenants also put limitations to the use of your property, however, these ones are imposed by the homeowners association.
  • Errors in public records - Sometimes these errors can be easy to fix and at other times a lot of time and money will be required to get the errors in public records fixed.
  • Forgery and Fraud - If the public records include forged documents, where the title of the house is in question, your ownership rights may be at risk when the forgery is discovered.

Types of Title Insurance

There are two types of title insurance: owner’s title insurance and lender’s title insurance.

Owner’s title insurance

This is the type of title insurance that we have been referring to so far. It is a one-time expense. You are not required to purchase owners’ title insurance, but it will surely help if you don’t want to deal with the headache of possible problems in the home’s title. The owners’ title insurance provides coverage equal to the price the house was purchased for and it is valid for the time that the owner and their heirs own the house.

Lender’s title insurance

The lender’s title insurance is a type of insurance that protects the financial interests of the lender who provided you the mortgage. In case that you default on your loan, in order for the lender to be able to sell the house, their claim needs to have priority above all other claims that may exist on the property. Contrary to the owners’ title insurance, you are required by your lender to purchase lender’s title insurance. Initially, the lender’s title insurance provides coverage for the whole principal balance of the mortgage. However, as the borrower repays the principal throughout the years, the coverage of the insurance policy declines accordingly.

Owners’ Title insuranceLender’s Title Insurance
Protects:HomebuyerLender
Required:NoYes
Coverage:Purchase price as long as the homeowner and their heirs own the propertyPrincipal balance initially, which decreases as the borrower pays up the balance

How does Title Insurance Work?

Owner’s title insurance protects you against problems with the title of your home that come as a result of past ownerships of the home and that would have probably affected your decision to buy the house. Owner’s title insurance can be used to cover for:

  • Debts owed to third parties from previous owners of the house, that are discovered later
  • Costs of a lawsuit someone with an interest in the ownership of the house may file against you
  • Costs to settle the case if a new owner is tricked into purchasing the house by a fraudulent seller who claimed to be the owner of the house

However, the owner’s title insurance does not protect you against problems with the house’s title that are created after you purchase the property. For example, if you do not pay a contractor who helped remodel your home and the contractor comes claiming ownership of the house since they were not paid, the owner’s title insurance cannot help you. Moreover, it doesn’t protect you in the scenario that the government decides to take your property to use it for a public purpose and compensates you in some other way.

On the other hand, the lender’s title insurance protects the lender if you somehow lose ownership of your home and the lender cannot get their money back from you. In this scenario, the lender would file a claim with the title insurance company for the money that you still owed before losing your home. The lender’s insurance also assures that the lender has the top claim on the house if you foreclose on your house.

How much does Title Insurance Cost?

Title insurance is typically 0.5% - 1 % of the purchase price of the home. In some states, title insurance costs the same no matter who you buy it from, however, in other states you can save some money if you shop around for the best rates. In some cases, you may receive a discount on your title insurance if both the owner’s title insurance and the lender’s title insurance are purchased at the same time.

Top Title Insurance Companies

Some of the biggest title insurance companies include:

First American Title Insurance Company

First American Title Logo

Founded in 1889 in New York, First American is one of the largest title insurance companies in the nation. It is a subsidiary of First American Financial Corporation that provides insurance protection, real estate information services, and settlement services.

Fidelity National Title Insurance Company

Fidelity National Title Logo

Headquartered in Jacksonville, Florida, Fidelity National Title Insurance company is a subsidiary of Fidelity National Financial, Inc. The company performs title-related services including underwriting, escrow, reconveyances, recordings, attorney services, foreclosure publishing, and more, as well as some specialty finance functions.

Chicago Title Insurance Company

Chicago Title Logo

Chicago Title Insurance is also a subsidiary of Fidelity National Financial, Inc. The company is headquartered in Chicago, Illinois, and offers title and closing services. Besides the two, Chicago Title Insurance Company also offers agency services, bancserv notary services, home warranty contracts, investment property exchange, etc.

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