For most people, buying a home is the single largest financial transaction of their lives. The home-buying process can be overwhelming, especially to first-time buyers, who may face a barrage of unfamiliar terms. One of the more confusing aspects to many people is title insurance.
WHAT IS A TITLE INSURANCE?
Title insurance is an upfront investment with a premium that is based on the policy type and purchase price of the property. Title insurance protects the owner and lender from title issues that were not found during the title search, including prior claims other parties may have to the property and outstanding debts of previous owners. If someone challenges the owner’s title to the property, the title insurance underwriter defends the title and pays related costs and losses in value that may result, up to a limit.
In Florida, the title insurance industry is highly regulated. Florida’s Office of Insurance Regulation defines the requirements for title insurance agents, along with the minimum rate a title insurance company may charge, the minimum protection insurance may offer, and how title insurance premiums must be calculated. Florida law also prohibits insurance companies from writing certain exceptions to coverage.
While title insurance premiums are set by Florida law, there are ancillary fees that may be negotiated, such as the title agent’s portion of the premium and the title agency fees.
There are actually two types of title insurance: an owner’s title insurance policy commonly called the Owner’s Policy and a lender’s title insurance policy.
OWNER’S TITLE INSURANCE
An owner’s policy protects the property owner against specific claims. In most cases, this policy will protect against contingencies like undisclosed heirs, spousal claims, forgery, and fraud. Additional coverage may be added at an extra cost to the premium. An example of additional coverage includes a restriction endorsement, which protects the owner of the home’s construction and inadvertently violates restrictions in the subdivision.
Only an owner’s policy will protect the buyer if a title problem comes up. In general, an owner’s policy costs 0.05% of the purchase price of the property.
LENDER’S TITLE INSURANCE
The lender also has a big stake in the ownership of the property. Just as most lenders require homeowners insurance and flood insurance before completing a real estate transaction, most require a lender’s title insurance policy before closing. This policy protects the lender’s interest in the property title. The lender will typically require the buyer or seller to purchase a lender’s policy equal to the loan amount.
Lender’s insurance must be purchased not only when a home is purchased but also during refinancing.
WHO PAYS FOR TITLE INSURANCE?
The seller or buyer may purchase the lender’s policy and the owner’s policy in Florida. Title insurance may be sold by title insurance companies, attorneys, and title agents. In Florida, who pays for title insurance often varies by county. In most cases, the seller pays for the lender’s title insurance and chooses the title insurance company while the buyer pays for the owner’s policy.
THE IMPORTANCE OF TITLE INSURANCE
A home is a major investment. Buying a home often comes with many types of insurance coverage to protect the home and property against theft, fire, damage, and floods. Title insurance is a unique form of coverage that protects the owner’s investment. Title insurance is an owner’s last defense if there are hidden title problems that could result in huge costs or even losing the home.
While not common, there are dozens of potential defects to a title that could go unnoticed during a title search, including a forged deed, an undisclosed loan, an inadequate legal description, or an unknown heir. What if someone shows up one day claiming to own the property? Or a construction crew arrives to bulldoze the property to build a road on a claimed easement? What about an unknown past-due property tax bill arriving? If these claims are legitimate and were not discovered during the title search, the property owner is left footing the bill or even losing the home without title insurance.
The entire investment in real estate depends on a clear title. Title insurance is an affordable means of protecting both lenders and buyers against these risks.
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