Buying a first home can entail a combination of emotions ranging from excitement to feeling overwhelmed. Throwing lots of new terminology – like title insurance, chain of title, closing – into the mix can also make it stressful. Most people haven’t heard of title insurance until their attorney or realtor mentions the importance of buying this protection for their investment.The American
Land Title Association (ALTA) reports that 36% of all real estate transactions have a defect in title. This means both buyers and lenders need to take precautions to protect their investment with title insurance.
There are two types of title insurance policies: a loan policy and an owner’s policy. The owner’s policy protects the homebuyer whereas a loan policy protects the lender. Most lenders usually require a loan policy when they issue you a loan secured by real estate. In this article we will cover details specific to an owner’s policy. Click here to learn more about a loan policy.
How is title insurance different from other types of insurance?
- Title insurance focuses on risk prevention, rather than risk assumption.
- It protects you against ownership claims against your property.
- Your title insurance policy is a one-time premium paid at closing.
- It provides protection to you and your heirs for as long as you own your house.
How it Works
When a property is financed, bought or sold, a record of that transaction is generally filed in Public Records. Further, records of other events that may affect the ownership of a property, like liens or levies, are also archived in the Public Records.
So, when you buy title insurance for your property, a title company (like Land Title Guarantee Company) searches these records to find – and remedy, if possible – various ownership issues. First, your title company searches Public Records to determine the property’s ownership status, whether it has been properly deeded, and what other parties may have an interest or claim in the property (lien holders or companies who may have an easement over your property, for example). After this search, the underwriter will determine the insurability of the title.
It’s a common misconception that a title search will uncover every possible defect in title. Title searches only discover events and documents of public record, so anything done illegally or without proper documentation may not be known until sometime in the future.
Prior to closing, the title company will issue a title commitment that lists requirements that must be met to clear any defects in title. Once these requirements are met and the closing takes place, the title company records the documents and issues the final title policy, which the new homeowner should keep in a safe place with other legal documents. Should a covered title problem arise, your title company will swing into action. They’ll resolve any issues and will stand behind the policy holder, both monetarily and with legal defense if necessary, to pay claims and defend the title to the property.
An owner’s policy may protect you from the below occurrences:
- Unpaid mortgages.
- Unpaid property taxes.
- Child support liens.
- Undisclosed heirs who surface years or decades later.
- Forged deeds, releases, or wills.
- Mistakes in recording, or deeds recorded but improperly indexed and therefore not discoverable by a title search.
- Liens for unpaid estate, inheritance, income, or gift taxes.
How Much Does Title Insurance Cost?
In Colorado, the seller typically pays the one-time fee. The rate will vary but is generally related to where the property is located and its value. Use our FREE Rate Calculator (LINK) to estimate how much your title insurance policy may cost.