Obtaining title insurance is a key part of the closing process. While claims on title insurance are rare, they can result in financial loss for homeowners and lenders without insurance. Whether you are a new title agent starting out in the industry or you just need a refresher on the basics of title insurance, use the following information to learn more about the process of obtaining title insurance for your clients.
What is title insurance?
A title insurance policy protects homeowners and mortgage lenders against financial loss resulting from problems with property ownership. It covers claims on a property that may arise after the real estate closing and that didn’t show up on the initial title search.
The term “title” refers to a property owner’s legal ownership rights to a property. Title insurance is a form of indemnity insurance that compensates insured parties against unexpected losses up to a certain limit—usually the property’s purchase price or loan amount.
The process of obtaining a title policy
A final title insurance policy, or simply a title policy, refers to the final terms of the title insurance. The process of obtaining a title policy begins when a mortgage lender orders title insurance from a title company at the start of the closing process.
After receiving the order, the title company performs a title search to review public records related to a property to identify any title defects or clouds on the title. Title defects may include liens, easements, and encumbrances that may impact ownership rights. During this process, lender-title collaboration is crucial to ensure efficiency, accuracy, and transparency leading up to closing day.
If the title search reveals issues with the title, the title company will try to clear the title and resolve any issues prior to closing. Not all issues are resolvable. In these cases, any issues will be moved from the ‘requirements’ section to the ‘exceptions’ section of the title commitment. Requirements are title issues that must be cleared before the insurance is finalized. Any issues labeled as an exception will not be covered by the final title policy.
Once all requirements have been resolved, the title company issues the final title policy. This final document is similar to the title commitment document, but it includes a policy jacket from the title underwriter. Additionally, the ‘requirements’ section from the title commitment is not included in the final policy because all requirements must either be resolved or moved to the ‘exceptions’ section.
Types of title insurance
There are two types of title insurance: owner’s title insurance and lender’s title insurance (also known as a loan policy).
Owner’s title insurance protects the homeowner. The owner’s policy is acquired during the closing process and is usually equal to the purchase price of the property. Owner’s title insurance is optional for homebuyers but it is highly recommended. Even if a homeowner purchases a property in an all-cash deal, they should still obtain title insurance as a grant deed does not necessarily guarantee a clear title. Owner’s title policies can protect homeowners from issues like:
- Liens from contractors, government entities, and previous lenders
- Encroachments and property boundary disputes
- Errors on the deed, property survey, or other recorded documents
- Forgery and fraud on past documents
- Outstanding lawsuits or unpaid child support from previous owners
Lender’s title insurance protects the lender against financial loss associated with providing a mortgage loan. This type of title insurance does not protect the homeowner’s equity and only covers claims that may impact the lender’s loan to the homeowner. Almost all lenders require homeowners to purchase lender’s title insurance when purchasing or refinancing property.
How much does title insurance cost?
Title insurance is a one-time fee that homebuyers purchase during the closing or refinance process. The owner’s title insurance is based on the home’s purchase price, while the loan policy is based on the amount of the loan. National averages for title insurance are between 0.5% to 1.0% of a home’s purchase price or loan.
Depending on the states that your title company operates in, your company may or may not be able to offer different rates for title insurance. In some states, title insurance rates are the same regardless of which title company a homeowner uses. However, other states allow title companies to offer different rates, meaning that homeowners can research multiple options to find the best deal. In this case, title companies may need to offer a differentiated closing experience to stay competitive.
Homeowners can research title companies on their own and also ask for recommendations from their real estate agent or lender. When conducting their own research, homeowners can take advantage of ALTA’s Title & Settlement Agent Registry to find companies in their area.
Why is title insurance important?
Homeownership is a significant financial investment. Purchasing a home without title insurance can increase risk and lead to financial loss. Although title insurance doesn’t protect homeowners against all possible infringements on property rights (such as eminent domain or payment issues), it reduces the risks associated with real estate investments.
For example, say a homeowner finds a great deal on a vacation property and plans to buy the property with cash. Little do they know that the seller committed home title theft by forging the deed to the property and selling it without the true homeowner’s knowledge. By not ordering title insurance, the buyer is not covered against title issues and may lose everything they paid for the sale. If they had ordered title insurance, the property’s true ownership would have likely been identified during the title search and if not, the homeowner would be protected against financial loss from the error.
Providing a differentiated closing experience
As a title agent, you and your company can provide peace of mind for homebuyers during the closing process and long after closing day. Delivering accurate and timely title insurance policies requires close communication between all parties involved in the closing process. Qualia’s real estate closing software empowers title companies to boost internal operations and strengthen relationships with partners and clients. Our cloud-based platform brings title agents, lenders, realtors, and consumers together onto one platform to deliver an exceptional, secure client experience.
If you’re new to the industry or considering a career in title, Qualia University can deepen your title expertise and advance your career. This first of its kind online training is for professionals interested in taking their title knowledge to the next level.