The home you’re buying has all the bedrooms you want, is in the part of Atlanta you want to live in and has a nice yard. There’s just one issue — you can’t be absolutely positive that the home’s title, which gives you the right to own the property, is 100 percent in the clear. That’s where title insurance comes into the picture. When people buy homes, they also purchase title insurance, which offers protection in case someone else tries to lay claim to the property.
What it does
Buying a home and applying for a mortgage is a multistep process. First, you need to prequalify for the home loan. Then, you look for properties and make an offer on one that suits you. When the offer is accepted, a title company does a search on the home’s title. The search might uncover claims made on the home, such as liens for unpaid taxes or claims from contractors who weren’t paid for their work by the past owner.
Even if the title search comes up clean, homebuyers purchase title insurance as an extra precaution. Being able to purchase a policy signifies that the search was performed and that there weren’t any issues with it. If any claim is made to the home’s title in the future, the insurance company will pick up the tab.
Title insurance is different from other forms of insurance because you don’t pay a monthly premium. Instead, the full price of the insurance is paid during closing. If you have a no-closing-cost loan, the insurance cost is included in the lender’s credit during closing.
Policy types
There are two types of insurance policy: a buyer’s policy and a lender’s policy. Who pays for the insurance depends on the policy type. Usually, the buyer pays for a lender’s policy, which protects the mortgage company if there is a claim made to the title. A lender’s policy covers the principal of the mortgage, and the amount of coverage decreases as you pay down the loan.
The other type of title insurance is an owner’s policy. While it’s difficult to get a mortgage without a lender’s policy, owner’s policies aren’t required in all states. For example, according to the State Bar of Georgia, you don’t need an owner’s policy in Georgia. It’s often recommended though, because the homeowner isn’t protected under a lender’s policy. An owner’s policy is usually purchased for the value of the home and will provide protection against any claims to the property, fraud or errors made during the title search. Like a lender’s policy, there is a one-time charge for the owner’s policy. It can be paid by you or by the seller. The policy lasts for as long as you own the home.
When buying a home, it’s best to get any title issues sorted out before the sale is final. If any surprises crop up down the road, a title insurance policy can protect both you and the mortgage lender.
Image source: Flickr
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