Buying residential real estate is a major commitment. The average home buyer invests as much as a third of their monthly income in mortgage payments and may diligently work for 30 years to pay off the principal balance on their home loan.
Particularly if someone has not purchased a home before, they may feel quite surprised when they receive the closing paperwork from their real estate agent. Instead of simply needing to cover the amount offered with mortgage funds, they need to typically come up with thousands of dollars in additional capital to cover closing costs.
One of the biggest expenses that may stand out from other standard costs relates to title insurance. Those financing a property typically have two title insurance premiums included in their settlement statements. One of those policies covers them as the buyer, and the other one helps insure the lender financing the transaction. What purpose does title insurance serve during a residential real estate transaction that makes two policies necessary?
Title insurance protects against ownership issues
A title insurance policy protects the lender or the buyer from the costs and losses possible in a title claim brought by an outside party. Properties sold as part of estate administration are among those that may be at risk of title claims in the future. Fraudulent activity could also lead to someone believing that they have an interest in the title to a property when they actually do not.
Title insurance companies typically perform a title search to look at ownership records and identify any issues that could lead to title claims in the future. Easements, liens and outdated ownership records could lead to delays in closing or a refusal to issue the policy.
Once the buyer and lender have policies, they have protection from many types of title claims in the future. Title insurance can cover the cost of retaining legal representation while responding to a title claim in court. A lawyer’s advocacy can make all the difference for someone trying to preserve their interest in a property.
If the party that brings the claim prevails and a judge determine that they have an interest in the property, title insurance can reimburse the lender for mortgage funds advanced and not yet recovered and can reimburse the homeowner for the loss of equity they suffer. Lenders typically do not follow through with transactions unless buyers pay for the cost of title insurance.
While those buying property can decline coverage to protect themselves, doing so might put what they invest in the property at risk. Understanding the costs that appear on a settlement statement can help people better prepare for residential real estate transactions. Those who understand the role of title insurance may feel less frustrated about the obligation to purchase not one but two title policies.
