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Title insurance is meant to protect the insured (the homeowner and bank that owns your mortgage) from a financial loss associated with the property. There are two types of title insurance policies associated with the purchase of a home. Title insurance covers any underlying discrepancies with a home that the title company missed during the home buying process.
In this article, we discuss whether purchasing the optional owner’s title insurance policy is worth the cost in Illinois. We’ll answer the following questions:
- What is title insurance?
- What does title insurance cover?
- What is the difference between the lender’s and owner’s title insurance?
- Is the homeowner’s title insurance really necessary?
- How much does title insurance cost and who pays for it?
What is title insurance?
When buying a new home, there will be many documents you’ll be asked to review and sign, most of which you’ve never seen before. These include appraisals, real estate contracts, purchase agreements, modification letters, just to name a few. At some point, you’ll likely be told that the closing will take place as “So and So Title Company.” But what is a title company? Are they there just to make sure the closing goes smoothly? And what’s this title insurance required by the lender, and why should I buy the owner’s title insurance policy if the lender already requires one? No one ever said buying or selling a house was simple.
Before breaking down the difference between the two types of title insurance it’s important to understand what the title tells you. Before the closing, the title company will perform research on the contingent home to determine if the current homeowner has full ownership stake in the property, free of any legal claims against it, and can in fact sell the property. Legal claims against a home or property come in many forms, the most common being a lien against the home from a lender, creditor, or possibly the government.
Title insurance is meant to protect the insured (the homeowner and bank that owns your mortgage) from a financial loss associated with the property. There are two types of title insurance policies associated with the purchase of a home: 1)The lender’s policy, and 2) the homeowner’s policy. All mortgage lenders require a lender’s policy to protect their interest in the home, but the owner’s policy is optional, although highly suggested, if a little ambiguous as to the reasoning.
What Does the Title Insurance Cover?
Title insurance covers any underlying discrepancies with a home that the title company missed during the home-buying process. Prior to the closing, the title company will run a public search to find any legal claims against the property that would dispute the seller’s legal right to sell the home. However, title companies are not perfect, and many legal issues can be hidden from the title company without much effort.
In most cases, a title search won’t turn up anything. But the last thing a new homeowner wants is to be told their new house actually has a preexisting lien against it from 5 years ago. Some common title issues that should be covered by title insurance include
- Filing errors;
- Back taxes;
- Title forgeries;
- Unknown heirs to the estate who come out of the woodwork to claim ownership;
- Conflicting or inconsistent wills;
- Liens from old bills, lines of credit; and
- Undocumented easements
What is the Difference Between the Lender’s and Owner’s Title Insurance?
Many home buyers ask the question, “If the lender already has a title insurance policy on the home then why do I need one?” The quick answer to that is the lender’s title insurance policy doesn’t cover the home buyer, soon to be the homeowner. But let’s take a closer look at what the two different policies cover:
- The lender’s title insurance policy is meant to protect them (the financial institution on the hook for your mortgage) from any issues that would arise with the title after closing. Pretty much all lenders require title insurance as part of the closing costs.
- The homeowner’s title insurance policy covers the same legal claims against a title as does the lender’s policy but for the homeowner’s.
Is the Homeowner’s Title Insurance Policy Really Necessary?
Like many types of insurance, the point of the policy is to protect against the 1% chance that an unforeseen legal claim crops up against the title at some point down the line. The new homeowner can’t simply turn around and say, “Well, the buyer knew about this and didn’t disclose it, so it shouldn’t be on me.” Unfortunately, once the property is sold the previous owner transfers a pretty good deal of liability under the title away from himself.
If a claim against the property suddenly pops up three, five, or even seven years down the road, and a homeowner’s title insurance policy wasn’t purchased, the owner’s the down payment and equity put into the home could be lost forever, not to mention the house itself.
How Much Does Title Insurance Cost and Who Pays For it?
Title insurance costs vary from state to state and property to property, with the average price being between $800 and $4,000; this is a one time fee. The home buyer can shop around for different policies ahead of the closing or opt to have the seller cover the cost of one or both policies. As with most things in real estate purchases who pays for what is up for negotiation.
Buying a house can be stressful, but you don’t have to shoulder the whole of the process on your own. Having an experienced real estate attorney can make all the difference between an exciting and enjoyable home buying process and a frustrating, hair pulling, crying in the car because nothing is going right during the home buying process. A good real estate attorney will know the best title companies in the area as they typically use the same handful so they know exactly what to bring to the closing table for a smooth, speedy closing. If you’re looking to buy or sell your home or commercial property don’t hesitate to give us a call at 630-324-6666.