Title Insurance: Why Lenders Require it and Buyers Need it
May 2, 2022
When buyers are completing their big purchase, they must plan for the many of the expenses that go along with it. Necessities like hiring movers, getting their mortgage approved, and finding a lawyer to complete the paperwork are all common expenses that most buyers are prepared for. However, one cost that often surprises buyers, especially first-time homebuyers, is title insurance.
In the grand scheme of the overall real estate transaction, title insurance is one of the smaller costs that buyers will face. Still, unlike hiring movers or splurging on a new couch and loveseat set, title insurance is not an optional purchase for those getting a mortgage. Lenders require title insurance as a part of completing the deal. This may seem like a surprise cost to some, but it actually serves a particularly important purpose in real estate transactions.
In this blog, we will break down what title insurance is and why it’s important for both buyers and lenders to have. With this valuable information at hand, buyers can feel confident when securing their new home.
What is Title Insurance?
There are no tricks in the “title insurance” name. Title insurance is, quite simply, insurance for the title on the home. The title is perhaps the most important legal document when it comes to home ownership, determining who is the rightful owner of the property. When a home is sold, the title is what is transferred from the previous owner to the new owner. In addition to representing the legal owner of the property, a title can contain other important information, like the company that holds the mortgage on the property, liens placed by builders or contractors, and even unpaid taxes.
Like vehicle or home insurance, which protects the insured property owner in the event of a costly occurrence, title insurance protects lenders and buyers in the event of a costly issue with the title. Title searches are done in the home buying process and, in many cases, title issues can be addressed before closing.
In some cases, problems with the title can come up after the title search is done and the purchase is completed. These are instances where title insurance is designed to offer protection.
What Types of Title Insurance Are There?
There are two types of title insurance that buyers will be offered as part of the closing process. The first type of title insurance is the most common, and this is lender’s title insurance. It is a policy which is required by the lender to fund the mortgage. Buyers have the choice of which title insurance provider they want to use, but they must have a policy in place to complete the purchase.
The other type of title insurance is buyer’s title insurance. This is optional to buy and provides additional coverage to the buyer that may not be included as part of the required lender policy. Typically, this type of insurance is negotiated in a way where the seller actually purchases the policy for the buyer in the event of future title issues.
Why Do Lenders Require Title Insurance?
As mentioned previously, it’s not uncommon for buyers to be surprised that they need to purchase title insurance to protect their lender. After all, lenders aim to complete their due diligence when preparing to fund a mortgage, including credit checks, calculating debt-to-income ratio, and verifying income. Why do they need insurance to protect them after all of that?
The fact is that a title defect can prove to be incredibly costly and likely won’t come about because of anything the buyer may have done wrong. The title defects that lenders want to be insured against are issues that have already occurred but are not yet reflected on the title.
A common defect that can be found when doing a title search is unpaid taxes to a city or county. In many cases, a lawyer sees this on the title and ensures the tax bill is paid as part of the closing process. However, there are cases where a delinquent tax bill may not be added to the title and, as such, does not appear in a routine title search at time of closing.
If this were to happen, the local government would eventually have their interest in the debt owed to them added to title. This would, for all intents and purposes, prevent future sale of the property until the tax bill is paid up. If the new owner is unable to pay, then the home could be put up for auction, where it may sell for less than the mortgage value and leave the lender in a loss position. Remember, the lender is using the property itself as security for the mortgage. If the security is sold out from under them, then their mortgage position is at risk.
Why Should Buyers Get Title Insurance?
The reasons buyers would want their own title insurance is very much the same as why lenders would want title insurance: to protect their financial interest. Lender’s title insurance is only meant to protect the lender. If a title defect were to fall outside the scope of that protection, then the buyer may find themselves on the hook to remediate the defect. This could come at a significant cost and result in extreme financial hardship or even loss of the home.
With increased fraud taking place, buyers may find themselves at risk of purchasing a property for which title was not legally able to be transferred to them. This is an extreme scenario that can cause incredible mental and financial stress for buyers. Title insurance can help alleviate some of that stress for buyers.
For these reasons, buyer’s title insurance is strongly recommended despite being optional. It’s an affordable way to get peace of mind when making the biggest transaction in life—and that’s worth the extra cost.
The Best Title Insurance Company
Janus Title is trusted by Chicago real estate professionals to deliver exceptional service. We offer the fastest turnaround in the industry as well a personalized service from the experienced executives that set our business above the rest.
To learn more about title insurance, contact the experts at Janus Title today.