Buying or selling a home may feel like a complicated process. Between choosing a real estate agent, setting a budget or sales price, navigating the mortgage approval process, comparing properties, negotiating offers, understanding closing costs and heading toward closing day, there is enough jargon involved to make anyone’s head spin. One of those terms that both home buyers and sellers will hear more than once is “title insurance.”
In case you’re not familiar with title insurance, let’s start from the beginning.
When a property is bought or sold, the documents that transfer the property are filed in public records. When other documents such as easements or liens are filed, they may affect ownership of a property; these also get archived as part of public record. All of this is part of what makes up a property’s title.
Title insurance provides homebuyers with the peace of mind that they own the property and the title insurer will defend their ownership should it be challenged. Issues like taxes, mortgages and judgments are reviewed and addressed prior to closing to make sure there are no surprises at the closing table. A title insurance policy also protects the mortgage lender and buyer in the rare case that the seller does not have legal ownership of the property.
Let’s talk about the types of title insurance policies and what they do.
There are two types of title insurance to know
Title insurance may consist of an owner’s policy, a lender’s policy, or both. It is customary for the seller to provide protection to the buyer for matters regarding title to the property, and the buyer to provide protection to the lender regarding the same.
In Illinois, the owner’s title insurance policy is typically paid for by the seller of the property.
The owner’s policy is purchased by the seller to protect the buyer’s interest in the property. An owner’s policy covers a broad range of problems that may arise, including unpaid taxes, deed errors, forgery, fraud and lack of access to the property. It also covers the buyer if the previous property owners’ unknown or long-lost heirs make a claim to the property.
The lender’s policy is purchased by the buyer and insures the lender that their mortgage is enforceable and they will be able to foreclose on the property if the owner fails to make the loan payments. It covers the lender up to the amount of the loan. Also called a mortgage policy, it remains valid until the home buyer either pays off their mortgage or refinances the loan.
In Illinois the buyer typically pays for the lender’s policy.
Title insurance is necessary to protect from significant financial loss
It is important to know that serious issues can arise during homeownership. At the most extreme, the sellers might knowingly try to sell the buyer a home they don’t own. While title issues are generally less malicious, they are usually complicated.
For example – imagine that you are a homeowner who recently bought a home, only to receive a letter from your neighbor that tells you that a portion of your home was built on their property. Or, picture yourself as a first-time home buyer who finds out after closing that the seller’s signature was forged and you don’t actually own your home.
In addition to protecting your ownership interest, the title search will also reveal documents that restrict your use of the property. For instance, the title commitment will disclose where the utility easements are located on your property so you can avoid building anything on top of them or if there are any restrictions on the height of the structures on your property.
Costs are paid by both the home seller and buyer
The owner’s title insurance is typically a small percentage of the average home price and protects the buyer’s ownership of the property. Typically paid for by the seller, it is a one-time fee at the time of closing and protects the buyer for as long as they retain ownership of the property.
The lender’s title insurance is a flat fee and paid for by the buyer as a condition of the lender to receive a mortgage. A lender’s policy isn’t necessary when the buyer is paying cash for the property.
In some cases, the home buyer or seller might be able to negotiate with the other side on sharing some of the title insurance costs. In an instance where a seller is especially motivated, they might issue a closing cost credit to the buyer.