Title insurance is one of the most critical protections a homeowner can invest in, but it is often misunderstood. For home purchasers who are paying complex mortgage fees, closing costs, taxes, and other types of insurance, the title insurance line item on a closing statement can seem confusing, duplicative, or even unnecessary. We will break down some common myths and misconceptions about title insurance, and explain what title insurance is — and what it isn’t!
Myth #1: Title Insurance Is A Waste Of Money
By far the most prevalent myth among buyers is that title insurance is a waste of money. After all, as a purchaser, you’ve just invested money and time into a title search that was supposed to reveal any potential defects in the title and give your attorney or agent time to correct them. Why, then, would you need to purchase a separate insurance policy to cover the title that was just researched and cleared?
Even the most thorough title search cannot account for all potential encumbrances on title. A title search generally examines the chain of title, reviews the property’s legal description, checks for judgments and liens, reviews mortgage information for the current owner, reviews recorded easements and encroachments that affect the property, and ensures taxes are paid. However, even the most thorough title search can miss some potential risks. For example, a fraudulent transfer somewhere in the property’s history might not be reflected in a title search. Likewise, a previously undiscovered heir may come forward even years after what appears to be a normal transfer of property in probate.
According to the American Land Title Association (ALTA), title insurance policyholders have filed well over 700,000 claims to date. In 2019, the industry paid out over $544 Million in claims, up from $535 Million in 2018. While most homeowners will never need to use their title insurance policy, it provides important protection for most homeowners’ most substantial investment.
Two title insurance policies are part and parcel of most real estate transactions: the owner’s title insurance policy and the lender’s title insurance policy. The owner’s policy is provided to the purchaser to protect against post-closing claims against title that might arise. The lender’s policy protects the mortgage lender’s priority as a creditor in the event of a claim against the property’s title. Lender’s title insurance is generally purchased by the buyer, and required by the mortgage lender. Owner’s title is generally purchased by the seller and provided to the buyer as part of the property’s closing.
Myth #2: I Don’t Need Title Insurance For A New Property Or Lot
Many purchasers believe that if they are buying a lot or new construction home, an owner’s title insurance policy is superfluous. However, even if a home is brand new or you are simply purchasing an empty lot, the land itself has likely changed hands a number of times. The same potential mistakes, lost heirs, or easement issues may still affect the title, even if the home is new.
In addition, owning a new home comes with other potential issues. Construction contractors and subcontractors might lodge mechanics’ liens related to new construction, and those liens may not show up in a title search until after a purchase has been completed. In addition, new construction may come with easements, HOA liens, or other encumbrances that can affect your use of the property. Even if you are purchasing new construction or an empty lot, title insurance is a critical protection for every homeowner.
Myth #3: Title Insurance Is An Ongoing Monthly Expense
Unlike other types of insurance, title insurance is not an ongoing monthly expense. This has to do with the backward-looking nature of title insurance. Most insurance policies are forward-looking — that is, you are purchasing protection against a future event, such as a car accident or medical emergency, that may happen in the future. By contrast, every event that is covered by title insurance has already happened at the time the policy is purchased.
Because of this fact, title insurance is a one-time only payment, made at the sale’s closing, and an owner’s title policy protects you for as long as you own your home.
Myth #4: I Don’t Need Title Insurance If I Have Comprehensive Homeowners Insurance
Title insurance and homeowners insurance protect against different types of claims. Homeowners insurance is forward-looking, and protects you against damage to the home or property itself, from flood, fire, theft, vandalism, or other covered event. Title insurance, as noted above, is backward-looking, covering title encumbrances that occurred before you purchased the home.
Myth #5: One Person Has Owned This Property Forever – I Don’t Need Title Insurance
Even if a home has been held by one owner for many years, title insurance is still an important protection. A home that has been owned by one family or owner, even for decades, might still be subject to mechanics’ or tax liens, unpaid HOA dues, and probate or estate disputes. Title insurance still offers critical protections against unrecorded or unknown claims.
Myth #6: Owner’s Title Insurance And Lender’s Title Insurance Must Be Purchased From The Same Company
In both Illinois and Wisconsin, it is customary (though not required) that the purchaser pays the premium for the lender’s title insurance policy, and the seller pays for the owner’s title insurance policy. For the sake of convenience, these policies are generally purchased from the same insurer, although this is not required. The owner and the lender are each free to choose their own title insurance company. In some sales, the parties select different title insurance companies. This is referred to as “bifurcated title insurance,” or a “split closing.”
Landtrust Title: Your Partner for Results
When your real estate agent works with Landtrust Title, you get a partner for results. We do things differently than other title companies — whether it’s personalized support, convenient closing times that meet your schedule, or quick and easy payment methods ensuring everyone gets paid right away, our attention to detail will help ensure a smooth transaction. We are happy to answer any and all questions you may have, and we’re obsessed with making your experience so seamless, you don’t even have to think about it. If you have questions about what to expect when your real estate deal closes, Landtrust Title Services can help. Please contact us today at [email protected] or by phone at 312.528.9210.