Title Insurance and How It Helps You Manage Risk

Today, I want to talk about something that all the borrowers pay for at closings but typically have little understanding or appreciation for. It is title insurance. Title insurance is a type of insurance policy designed to protect both the owner (real estate investor) and the lender from financial losses related to title defects or disputes that may arise after a real estate transaction has closed. Here’s how it works and how it protects both parties:

What Is Title Insurance?

Title insurance protects against issues that could threaten property ownership due to past events. These issues could include errors in the public record, undisclosed heirs, forgery, fraud, or unresolved liens. The title insurance policy ensures that if a defect in the title is discovered later, the insured party (borrower or lender) is protected from the legal and financial consequences.

Types of Title Insurance:

There are two main types of title insurance policies:

• Owner’s Title Insurance: Protects the borrower/homeowner.
• Lender’s Title Insurance: Protects the lender, and is required when a mortgage is involved.

How Title Insurance Protects the Borrower (Owner’s Policy):

The owner’s title insurance policy protects the buyer’s financial interest in the property, usually for the full purchase price, and offers coverage against:

• Ownership disputes: If someone claims they have a legal right to the property (such as a long-lost heir or previous owner).
• Liens: If unpaid taxes, mortgages, or other debts are discovered after the closing.
• Forged documents: If a forged or fraudulent deed is uncovered that invalidates the buyer’s ownership.
• Errors in public records: Mistakes in the recording or documentation of property ownership.
• Boundary disputes: If the property’s boundaries are in dispute.

If an issue arises, the title insurance company may:

• Pay for the legal defense against claims on the title.
• Cover the costs of resolving the title issue.
• Compensate the homeowner for financial losses up to the policy amount if ownership is lost or affected.

How Title Insurance Protects the Lender (Lender’s Policy):

The lender’s title insurance policy protects the lender’s interest in the property, usually up to the loan amount, in case of a title defect. This is almost always required by the lender when financing is involved. It covers:

• Loan repayment: If a title issue arises that affects the borrower’s ownership, the lender is protected against the loss of its collateral (the home) and the ability to recover the loan.
• Priority of lien: Ensures that the lender’s lien on the property (mortgage) has priority over any other claims.

In short, while the owner’s policy protects the homeowner’s equity and interest in the property, the lender’s policy ensures that the lender can recover their loan if title issues arise.

The simplest way to think about title insurance is that it helps real estate investors manage their risk. Post-closing title defects don’t arise every day, but when they do, they can render your property virtually unmarketable. The structure might be intact, but the financial impact may be similar to a fire and hurricane combined. For that reason, at New Funding Resources we require our borrowers to purchase both owner’s and lender’s insurance policies.

How to Obtain Title Insurance:

The good news is that obtaining title insurance requires little additional work on your part. You will generally work with a title company that handles the process as part of your real estate transaction. Here’s how the process works:

• Once you have chosen a title company, they will perform a title search to review public records and ensure the property has a clear title.
• After the search, the title company provides a title report summarizing their findings. The report lists any issues that need to be cleared before the insurance can be issued. If problems arise, the title company may work with the seller to resolve them before closing.
• Once all obvious title defects are cured, the title company will obtain a insurance from a title insurance provider. Some of the better-known insurance providers are First American Title Insurance Company, Old Republic National, Chicago Title Insurance Company, and Fidelity National.
• After closing, you’ll receive copies of your title insurance policies, as well as a deed proving your ownership. The title company usually handles the recording of the deed with the county recorder’s office to make it official.

What Are the Costs of Title Insurance:

Unlike other insurance types, title insurance is paid for only once at closing, rather than through ongoing premiums. The coverage lasts as long as the homeowner owns the property or until the mortgage is fully paid off. It’s generally listed as part of the closing costs on the Closing Disclosure form, which itemizes all fees involved in the transaction.

The cost of title insurance varies depending on several factors, including the location of the property, the value of the home, and the loan amount. For owner’s title insurance, the cost is typically based on the purchase price of the property. On average, the typical owner’s insurance policy cost in the DMV area is between $1,000 and $3,000, depending on the purchase price.

The cost for lender’s title insurance is usually lower than the owner’s policy because it’s based on the loan amount, not the purchase price. The typical costs range from $250 to $500. If you buy both owner’s and lender’s policies from the same title company at the same time, you may qualify for a bundle discount.

Who Pays for Title Insurance?

Typically, the costs of the owner’s and lender’s insurance are charged to the borrower.

Key Takeaway:

Title insurance is crucial for real estate investors because it protects against potential financial losses from undisclosed issues or defects in a property’s title, such as liens, unpaid taxes, ownership disputes, or fraudulent claims. These issues can arise after closing and, without title insurance, the investor would be responsible for resolving them, often at significant legal and financial cost. By securing title insurance, investors ensure that any title-related problems are covered, allowing them to focus on maximizing their investment’s profitability without the risk of unexpected legal disputes or claims affecting their ownership rights.