Most people believe that ‘homeowners insurance’ is the most important type of real estate insurance plan which is not true.
The homeowners’ policy protects your house in case of theft and damage. You consider it important because of how much money is at risk.
The title insurance also protects the same asset and the same amount of money.
This type of insurance protects you from past mistakes or uncovered errors in your home purchase documents. Title insurance helps you avoid problems if your seller or the previous seller has intentionally or unintentionally committed a fraud. In case, the sellers were not the owner of the house, and they sold the house to you, then the title insurance makes sure that you do not lose your home and are protected from legal consequences of owning a house that was not ‘free & clear’ at the time of sale.
It remains a question, how can you obtain title insurance and who pays for this policy.
When you purchase title insurance, the company will conduct a detailed search to ensure there are no ownership issues with your new house. You will pay a one-time fee or premium for this service. That is all you have to pay for this insurance policy, and the policy remains valid for as long as you are the owner of the house.
Depending on your mortgage amount and policy coverage, you may pay $2-$4 for every $1,000 of house price. According to an online estimate, you will pay $2,400 for a house worth $170,600. As a general rule, the title insurance costs 1% of loan amount. It seems like a lot of money, but without an adequate title insurance policy, you are risking an investment worth $170k. So, it is best to apply for title insurance and avoid any future issues.
In a buyer’s market, it is customary for the seller to pay for title insurance. It is not mandatory, but you can negotiate, and some sellers might feel motivated to purchase this coverage for you. Because of this scenario, we have observed, that most buyers pick the first ‘title insurance company’ suggested by their seller. It might be a right decision but not always. You should shop for best rates in the market.
Feel free to get recommendations from agents, attorneys, mortgage brokers and financial institutions.
You are responsible for purchasing the insurance policy for yourself and your lender. The owner’s policy may cost a little bit more than the lender’s policy. You see, lenders want themselves to be protected against lien issues and they want to ensure that in case of non-payment, lenders are the first lien holder. The lender’s insurance policy remains effective as long as they are the lien holder on the house. In case of refinancing or sale of the house, a new insurance policy will be needed.
For the owner’s policy, the insurance company will assign you a cost based on the price of your house which is likely to go up in the future. The insurance company will search, checking for mortgage records, deeds, wills, divorce decrees, spouse claims, court judgment and tax records.
As for the lender’s policy, the cost is calculated by checking the loan amount. The value of lender’s policy goes down by each year as you continue to pay off your mortgage.
You can avoid paying double payments by using a ‘simultaneous rate policy.’ It protects both you and the lender.