Between homeowner’s, mortgage, and title insurance, it can be tough to keep all the policies straight that are meant to protect your real estate investment. But they all serve a particular purpose. When you get ready for closing, you will probably see title insurance listed as part of your closing costs. This is a common line item that property owners should understand because it protects their interests.
If you are buying a property, you want to make sure that you get a clear title, meaning you own the property without any hinderance or errors. If there are any problems, you’ll be glad you have title insurance.
What is Title Insurance?
Mistakes are possible when transferring ownership of a property. Title insurance is a type of insurance policy that protects the policyholder from potential losses, damages, and legal fees arising from undisclosed defects in the past chain of title or errors in the recording of the title for the property.
Title insurance began in the 19th century as a means to protect against clerical errors, recording mistakes, and fraud. This coverage also overrides any claims made on the property based on outdated documents that the buyer was unaware of at the time of purchase.
Two Different Types of Title Insurance
According to the American Land Title Association (ALTA), more than one-third (36%) of all real estate transactions have a title defect. This means that anyone with a financial stake in a piece of property needs to protect their interests with title insurance. That’s why there are two different types of title insurance sold:
Lender’s Title Insurance
This title insurance protects the mortgage holder if there is ever a claim against the property due to a title defect. Because of this, all lenders require title insurance, and you’ll see it included as part of your closing costs.
Owner’s Title Insurance
Owner’s title insurance protects the homeowner’s interests against title defect claims. Under Maryland law, the title company handling the closing within the state must offer the purchaser title insurance. While it isn’t a requirement, most mortgage and real estate professionals recommend it.
How Much Does Title Insurance Cost?
The fee for title insurance is generally a one-time charge. The ALTA estimates that title insurance costs roughly 0.5-1% of the property’s purchase price. Most title companies will show your rate for title insurance on the settlement statement. It will probably be bundled with your fees for escrow services.
Who pays for title insurance varies. Every deal is different, and you may negotiate having all closing costs paid by the seller or the buyer. If you are paying for title insurance, make sure you are working with a reputable title insurance company in Maryland that will get you competitive rates and the right coverage.
Common Defects in Property Titles
If you’re wondering what types of claims title insurance protects against, there are quite a few. Common issues include clerical errors, undisclosed documents, and liens against the property that weren’t uncovered during the title search. Here are some examples:
- Previously unreported liens– A second mortgage that wasn’t recorded or an unpaid tax bill by a previous owner are common examples.
- Ownership transfer by fraud– Examples of this are illegally prepared documentation and ownership transfers that involve forgery or identity theft.
- Undisclosed heirs to the property– Someone connected to a past owner could claim property rights after the home has been transferred to the new owner.
- Unintentional clerical errors – Mistakes can happen unintentionally. Examples are the loss of digital files and transposed figures or other clerical errors.
- Property encroachments– One example of an encroachment issue is when a neighbor expands their home across the property owner’s boundary line.
- Current disputes or lawsuits– There may be current court cases that involve the property, such as a bankruptcy or divorce.
- Errors and omissions on the Deed of Trust– An incorrect address, misspelled name, or the wrong legal description for a property could cause title issues.
This isn’t an inclusive list, but it should give you a good idea about why title insurance is essential.
The bottom line – Title insurance gives buyers and lenders peace of mind against any unknown risks related to a property’s title. Without it, those potential issues could cause future financial and legal strain on you and your property.
Contact Maryland’s Premier Title Company – United Title
If you have any questions about title searches, title insurance, or the closing process, United Title can help. We have nearly 30 years of experience in the title industry and offer competitive title insurance rates to clients throughout Maryland. Contact us today at (410) 544-5441 for more information.