Buying a home for the first time can be an intimidating process. After all, for most of us, our home is our single most valuable asset, and making an expensive mistake can have consequences that reverberate through our finances for years.
The most important thing first-time homebuyers can do is educate themselves about every aspect of the homebuying process, from what to expect during the escrow process to what each line item on your closing sheet means. One of the most mystifying of those line items for many first-time buyers is “title insurance,” which can even appear twice on your closing statement. Learning more about title insurance can help first-time buyers to avoid taking on unnecessary risk and help to avoid costly mistakes down the line.
What Types Of Insurance Do I Need When I Purchase A Home?
When you purchase a home, you’ll no doubt be faced with a new list of insurances you’ve never heard of before. Homeowners insurance, mortgage insurance, flood insurance, a home warranty, and title insurance are all line items you might see on a closing statement.
The concept of homeowners insurance is probably familiar to anyone who has ever rented an apartment or owned a car — like renters insurance or car insurance, homeowners insurance protects your investment in the event of a devastating disaster or other event. Homeowners insurance ensures you will be made financially whole in the event of a fire, severe weather event, or even theft or vandalism. Homeowners insurance, like most insurance, is “forward-looking” — that is, when you buy it, the events it is meant to cover have not happened yet.
Mortgage insurance protects your mortgage lender in the event that you default on your mortgage obligations, and the type of mortgage insurance you will be required to carry depends on the type of mortgage you take out and the lender’s requirements. Private mortgage insurance, for example, has little-to-no upfront cost and requires only a monthly payment, while mortgage insurance on an FHA loan requires both an up-front and a monthly premium payment.
Standard homeowners insurance policies do not cover damage due to flooding. However, if your home is in a floodplain, or a location prone to flooding, your mortgage lender will likely require you to purchase a separate flood insurance policy. This policy is similar to your homeowners insurance policy in that it covers structural damage and damage to your belongings, but it only applies to damage caused by flooding.
When you are buying a home, you may be offered a “home warranty” that applies to some of the home’s systems such as the HVAC unit or the home’s electrical system. As a buyer, it is important to understand what a home warranty is — and what it isn’t.
A home warranty is not insurance, and it will not reimburse you in the event of catastrophic failure of one of your home’s systems. For that, you would rely on your homeowners insurance policy. Instead, a home warranty is a contract with a home warranty company that provides for discounted repair and replacement service on your home’s major components. If a repair is covered by the terms of your warranty, the warranty company will repair or replace the item for only the discounted cost of a service visit.
Home warranties are often limited, and can have significant exclusions. For that reason, it is important to read and understand the terms of your home warranty, including your obligations as a homeowner to ensure that routine maintenance is performed.
Title insurance protects the policy’s insured against a claim that the purported owner of the house does not, in fact, hold clear title to the home. This can be the case for several reasons: a prior owner may have failed to inform an heir of the sale of the property, or an old tax or mechanic’s lien may surface, creating a controversy as to whether you, the buyer, actually own the home. Title insurance protects your interest — and your lender’s interest — in the event someone else makes a legal claim that they have an ownership interest in your home. Title insurance is the only insurance line item that is backward-looking, meaning that it protects only against claims that arose before you purchased the home.
There are two types of title insurance policies: lender’s title insurance, also called the lender’s policy, and owner’s title insurance, or the owner’s policy. The owner’s policy protects your interest in the home, while the lender’s policy protects your mortgage lender’s interest in the event of a claim against your ownership interest.
For example, if a long-lost heir appears claiming that they are the rightful owner of your home, your owner’s title insurance policy will defend you against the legal claim and, if you lose, will ensure you are made financially whole for your loss. Similarly, the lender’s title insurance policy will protect your lender’s interest in the mortgage they provided you.
At closing, you as the buyer will pay for the lender’s policy, while it is customary for the seller to purchase the owner’s title insurance policy. Both policies require only a one-time payment, and provide valuable protections against rare, but potentially devastating claims that could force the sale of your new home. The owner’s title insurance policy protects you, and your heirs, for as long as you own the home.
Warranty Of Title
As a homebuyer, you may also hear the term “warranty of title.” A warranty of title is a guarantee from your home’s seller that they have the legal right to grant title to the buyer. If it turns out that this is not, in fact, the case, the warranty gives the buyer the legal right to seek damages from the seller.
A warranty of title is not a replacement for a title insurance policy. Even if your home comes with a warranty of title by default, the only right this warranty grants you, as a purchaser, is a right to pursue a claim against the seller. If the seller is “judgment-proof,” or financially unable to pay the claim, your claim may be worthless. A title insurance policy remains your best bet to protect your financial interest in your home.
Learn More From Your Trusted Title Insurance Company
As a first-time buyer, protecting your interests and assets during a home purchase with title insurance may be the most important thing you’ll ever do — and you don’t have to navigate the ins and outs of owner’s and lender’s title insurance policies alone. If you have questions about what title insurance can do to protect you, what it involves, or how to get it, Landtrust Title Services can help. Please contact us today at [email protected] or by phone at 312.528.9210 to get answers to all of your questions.