Title Insurance: What is it and why do I need it?

by Sarah Murray

Purchasing a home is the largest investment that most people make in their lives.  As part of the home buying process, title insurance is often required, especially if you are financing the purchase, and is always recommended.  However, many people do not understand what title insurance is or why they are required to purchase it.  Instead, people tend to view title insurance as a necessary closing cost with little or no explanation.  This article addresses what title insurance is and why it is important.

Title insurance is an insurance policy that covers title issues that arise after you purchase or refinance a property.  Title insurance guarantees that the seller of the property owns it free and clear of any liens or encumbrances and that the seller is able to transfer clear title to you as the purchaser.  If a title issue comes to light that negatively impacts the property after you close on the purchase, title insurance will kick in and do what is needed to resolve the issue.  For example, you may find when you try to sell the property that a prior mortgage was never satisfied or you may learn at some point that a prior deed was fraudulently recorded.   Likewise, a search of a property with a mortgage foreclosure in the chain of title may reveal a glitch somewhere in the process that causes a cloud on the title.  Without title insurance, you would be responsible for any costs needed to clear the issue.  This may involve hiring attorneys, paying outstanding liens or unsatisfied mortgages, or possibly even losing the property.

Unlike homeowner’s or mortgage insurance, both of which cover potential future issues, title insurance covers from the time of purchase back in time.  The title insurance premium is a one-time fee that is paid at the time of settlement.  In Pennsylvania, the premiums charged by most title insurance companies are regulated and approved by the Pennsylvania Insurance Department.  Your title insurance premium includes a title search of the property, the preparation of standard closing documents including the settlement sheet, and the handling the settlement itself.  Tax certifications, notary fees, recording fees, and similar fees are paid in addition to the title insurance premium.  In Pennsylvania, the buyer is commonly the party to pay these fees.

Both lender’s title insurance policies and owner’s title insurance policies are available in connection with a transaction.  If you are taking out a loan to purchase the property, the lender will almost always require you to purchase a lender’s policy.  Lenders also require a lender’s policy if you are using real estate that you own as collateral for a loan separate from a purchase.  A lender’s policy is issued in the amount of the mortgage and protects the mortgagor in the event that an issue arises.  Many lenders also require endorsements to the policy (for an additional fee, of course) based on specific circumstances of the purchase.  For example, endorsements are often required in lieu of a survey, if a property is part of a condominium or planned unit development, or if the loan has a variable interest rate.  A lender’s policy lasts throughout the term of the mortgage.

In addition to a lender’s policy, most purchasers also elect to purchase an owner’s title insurance policy.  An owner’s policy is issued in an amount equal to the property’s purchase price and protects you (as opposed to the lender) as long as you own the property.  When purchased along with a lender’s policy, the cost for an owner’s policy is minimal.

Many lenders, real estate agents, and builders are affiliated with title insurance companies and, in turn, often recommend an affiliated agent to issue the title insurance policy and handle settlement.  These affiliated relationships must be disclosed to buyers in writing and you, as the buyer, always have the right to shop for and choose the provider of these services.  Since the cost of title insurance is regulated and any cost savings would be minimal, you are encouraged to choose the agency that you are most comfortable dealing with to protect one of the largest investments that you will ever make.

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