First-time homebuyers often encounter new terms and concepts during the purchasing process. Title insurance can be one of the most confusing.
Veterans and military members might hear they need “clear title” on the home they hope to buy. But what exactly does that mean, and why is it important?
Let’s take a closer look.
Having “clear title” means there aren’t any liens, property disputes or other legal defects related to the property you’re hoping to buy. Issues from the home’s past could wind up coming back to hurt both the lender and the new homeowner.
A contractor who never got paid could have slapped a lien on the home. The seller’s ex-spouse may have forged a signature on a second mortgage that the seller didn’t know about. A long-lost heir could show up after the purchase and claim they’re the rightful owners of the home.
These and dozens of other scenarios are all possible, and the claims don’t just disappear when you purchase the property. You would inherit them, and all the potential legal expenses that go with them.
That’s where title searches and title insurance come into play.
Once you’re under contract on a home, a title company will conduct a search of public records looking for liens, easements, legal claims and other issues that could impact the property. Most of the time it’s smooth sailing – either there are no problems or issues that arise are cleared up before closing.
But lenders won’t move forward on a property unless there’s a clear title.
There are two different types of title insurance – policies for lenders (lender’s title) and for homebuyers (owner’s title).
Lenders will require the purchase of lender’s title insurance. This policy protects only the lender’s financial interest in the property.
Buyers are responsible for this cost, although you may be able to have the seller cover it as part of your overall closing costs negotiation.
Lender's title insurance does not protect you or safeguard your financial interests when it comes to title-related issues.
To protect their own financial interest, buyers can also choose to pay a one-time fee at closing for owner’s title insurance. This policy protects you and your heirs and requires the title insurer to pay costs and claims associated with a qualified title issue.
Prices for title insurance can vary. Homebuyers can shop around for the best policy and negotiate with home sellers about paying these costs.
While it’s optional, purchasing owner’s title insurance helps safeguard your financial interests. Without it, homeowners would have to pay legal fees from their own pocket to fight title issues in court. You could even lose the property and any equity that goes along with it.
If you purchase owner’s title insurance, the title company is responsible for covering those costs and making you whole if need be.