When buying that dream home in the Garland, Rowlett, or Rockwall areas, one of the last things you are likely to think about is the title policy. However let’s look at why your lender requires you to purchase a title policy or why it makes sense to purchase a title policy if you are paying cash.
What is title insurance and why do you need it?
Title insurance is an insurance policy that is designed to protect the lien holder (mortgage company) and the new homeowner from any “clouds on title” that could impact the title of the home in any adverse manner such as:
- Fraud and forgery
- Errors or omissions
- Mistakes in examining records
- Conflicting wills
- Undisclosed heirs
Definition of ‘Cloud On Title’: Any document, claim, unreleased lien or encumbrance that might invalidate or impair the title to real property or make the title doubtful. Clouds on title are usually discovered during a title search. (Read more)
Types of title insurance policies
There are two types of insurance policies: a lender’s policy and an owner’s policy. Let’s look at each one and what they cover.
A lender’s policy only protects the mortgage lender. If you are paying cash for a property you are likely not going to need to purchase a lender’s policy. It covers:
- Mechanics liens and unrecorded liens such as an unpaid bill for work that was completed on the property.
- Unrecorded easements, such as a fence line that crosses into your property and has been used by the neighbor for several years.
- Unrecorded documents such as “one-dollar deeds,” whereby a family member may attempt to gift the property without going through proper legal channels.
An owner’s policy is designed to protect the investment of the homeowner. It covers:
- Mistakes in record keeping
- Defects in records
- Encumbrances or judgments
- Deed omissions
- Undisclosed heirs
Is Purchasing A Title Policy Required or Necessary?
The answer is it depends, but it is highly likely you will need to purchase a title policy. According to the U.S. Department of Housing and Urban Development, “Title insurance is usually required by the lender to protect the lender against loss resulting from claims by others against your new home.” Therefore when you are purchasing a home and you secure a mortgage for the purchase, you are more than likely going to be required to purchase a lender’s title insurance policy.
An owner’s title insurance policy, on the other hand is optional. However, it’s a worthy investment that can save you a lot of money and heartache in the future if there are any discrepancies as previously noted above that could be associated with the title of your new home or condo. An owner’s title policy is especially pertinent if you’ve invested a substantial down payment on your home, as it will protect the equity.
Is the policy renewed each year?
No. You only pay for the cost of the policy in most cases one time. An owner’s policy belongs to you until you decide to sell your home. If you refinance your home with a different lender you will be required to purchase a new lender’s policy. Therefore keep in mind that if you refinance your home with the same lender you can save a great deal of money.
Owning a home
No doubt, owning a home can be a dream come true. Title insurance not only protects your equity while you own the home, it’s also there when you decide to sell your property. If title issues arise and you’re not covered, you will be responsible for any associated costs. Title insurance is an essential cost to protecting your investment.
If you have ever had to use your title insurance, I would love to hear your story. Please share it in the comment section below.