There’s no doubt that buying a home is a big milestone. But it can also be stressful.
Despite your preparation, it’s possible you might overlook a few things, like the status of the property’s title. What if there are outstanding liens or someone else asserts ownership rights on you house?
That’s where title insurance comes in.
In this post, we will discuss what title insurance is, how much it costs, and whether you need it or not. Let's dive in.
What is Title Insurance?
All real estate transactions involve the use of a property deed — a legal document that records the transfer of the title of a property from a seller to a buyer.
Although it may sound surprising, a property deed can be incorrect or faulty. As a result, a third-party can challenge your ownership of the property. Legal complications arising due to title defects or a bad title can cost you more than the property’s purchase price or even force you to give up the property with few options to recover losses.
Thankfully, title insurance is a solution.
Title insurance offers protection to you and the lender if a third-party later claims to have a legal right to the property that predates your purchase. This can include claims from unpaid contractors or unpaid taxes.
Lender’s title insurance is mandatory if you take on a mortgage. It protects the lender against problems with the title deed that can put them at risk. But what if you don’t want to leave things only at that? What if you want to protect your ownership interest in your property? In that case, consider buying an owner's title insurance policy, which protects you instead of the mortgage lender.
You can buy title insurance from your mortgage lender or you can buy it from another insurance company. By shopping around, you may be able to find a better deal and save money.
If you want to purchase an owner’s insurance, it might be a good idea to get it from an insurance company you already work with. Often, you can get a sizeable discount for having multiple with a single provider.
Understanding the Different Types of Title Insurance
Title insurance falls into two categories: Lender’s title insurance and owner’s title insurance.
Lender's title insurance
This protects your mortgage lender by ensuring that they have the highest claim on your property. You have to buy lender's title insurance when you get a mortgage and the insured sum usually equals the principal borrowed. The benefit amount gets smaller over time, as you repay the home loan.
Owner’s title insurance
Owner’s title insurance offers you (the homeowner) protection against third-party claims on the property from before you purchased it.
Owner’s title insurance is not mandatory, though many financial experts recommend having it. The benefit amount remains the same throughout the coverage period and typically equals the property’s purchase price.
How Does Title Insurance Work?
Let’s say you buy a home only to find to that a third-party has a filed a lawsuit against you claiming ownership to it. In this case, your owner’s title insurance policy will cover your legal fees. Your policy can also come to your aid if you are a victim of a property title fraud by providing you with a cash settlement. Furthermore, in the event of a previously undiscovered property lien, owner’s insurance will cover the cost of paying it.
While a lender’s title insurance does not directly benefit the borrower, you may still want to know how it works since you are paying for it.
If you buy a house with a forged property deed and you lose the ownership, you will obviously stop the monthly mortgage payments. In this situation, the lender could submit a claim with the insurer to recover the expected mortgage payments.
If you stop paying mortgage payments under any other circumstance, the lender has the option to foreclose on the property and recover their money by selling it. However, if it is discovered a third-party has a legitimate claim to the property, foreclosure is not a viable option.
What Does Title Insurance Cover?
Title insurance offers protection against any deficit in the property's title that might cause serious losses.
Keep in mind that lender’s title insurance, which is mandatory if you are taking a mortgage, protects only the lender. It won’t protect you in case it is later found that the seller doesn’t have the legal right to transfer ownership.
However, if you have an owner’s title insurance policy, your financial investment will be protected if a third-party makes a claim on the property.
Owner’s title insurance offers you protection against a wide range of risks, including:
- Inconsistent wills
- Undisclosed heirs
- Property survey errors
- Forged documents
- Building code violations
- Undiscovered property liens
- Defective paperwork
- Encroachments
- Property boundary disputes
- Zoning violations
- Subdivision restrictions
What Does Title Insurance Does Not Cover?
There are some title problems which are not covered by this type of insurance. For example, if a title problem is caused by your action, such as not paying for a roof replacement or paying your property taxes, title insurance won’t pay out.
Generally speaking, title insurance does not protect against issues that arise after the property is purchased, but rather against issues that could have influenced your decision to buy if you had known beforehand.
Title insurance does not offer protection against:
- Environmental hazards
- Zoning bylaw violations
- Known title violations
- Native land claims
- Issues or defects not listed in the public records
The Cost of Title Insurance
Title insurance is a one-time charge, not a recurring expense. The cost of owner’s title insurance is about $250. The cost of lender’s title insurance, on the other hand, depends on the size of the mortgage. Combined together, both policies typically cost anywhere between 0.5% and 1% of the purchase price. So if the purchase price is $500,000, expect to pay somewhere around $2,500 to $5,000.
Title Insurance: Is it Necessary for You?
If you are taking on a mortgage, lender’s title insurance is mandatory. Owner’s title insurance, on the other hand, is optional. But buying it is a smart decision because it protects you if someone legally challenges your ownership rights after the purchase. The premium is a one-time fee and included in the closings costs.
If you have any questions about title insurance or any other life insurance products, reach out to a Dundas Life licensed insurance advisor. We're more than happy to help.
Frequently Asked Questions
Is it possible to buy title insurance after you paid the closing costs?
You must purchase lender’s title insurance before or at closing, while the owner’s title insurance can be bought at any time.
Do I have to buy title insurance if I buy a property in cash?
No, you don’t. Lender’s title insurance is required when taking on a mortgage, whereas owner’s title insurance is optional. That said, you may still want to look at owner’s title insurance since it protects your from financial losses if any problem arises with the property’s title.
What happens if a title dispute arises after I've purchased title insurance?
If a title dispute arises, your policy can pay the cost of an undiscovered lien or the legal fees incurred by if a third-party sues you and challenges your property ownership rights.
Can title insurance be transferred to a new owner if I sell my property?
No, you cannot transfer the title insurance to a new owner. It belongs to you and only you.