Title insurance is not quite like most common forms of insurance. With traditional insurance, such as car, life or homeowners, the policy is put in place to protect the insured from future losses. Title insurance, however, protects buyers and lenders against future claims for past occurrences. Having this insurance ensures that you can convey the title to another without defects or encumbrances and defends you from claims against the property from others up to the amount of your policy. Buying a home is often the single largest financial investment most Americans make in their lifetime. Therefore, protecting that investment from issues of ownership and other hidden title defects is a smart layer of security any buyer should seriously consider.
Types of Title Insurance
There are two different types of title insurance. One offers monetary and legal protection to owners and the other is for lenders. Often, in order to ensure everyone involved in the transaction is adequately shielded from risk, both owners’ title insurance and lenders’ title insurance will be necessary.
Lenders’ Title Insurance (Loan Policy)
In nearly all cases, lenders will require the borrower to purchase lenders’ title insurance, called a loan policy, so that the lender’s interest in the property is protected until your loan is paid off or refinanced. It is usually based on the dollar amount of the loan and decreases as you pay down your loan until it eventually disappears as the loan is paid off. This title policy typically comes after a property title search is completed, so while the policy only protects the lender, it does offer some assurance to the buyer. These can include extended policies as well.
Owners’ Title Insurance (Owner’s Policy)
The other type of title insurance is owners’ title insurance, also called an owner’s policy. This is typically purchased by the buyer in order to protect themselves against title problems that may come to light in the future. Owner’s policies are usually issued in the amount of the real estate purchase for a one time fee that lasts for as long as you have an interest in the property. Basically, they provide assurance that the title insurance company will help you monetarily and defend you legally if need be in the event that an unforeseen or hidden title problem surfaces. Owners’ title insurance also has the option for extended policies.
Title Searches and Title Insurance
In order for a title to be considered clear, title companies must perform a title search on the property in question. A title search is a rigorous examination of public records in order to determine if there are any liens, lawsuits, unpaid taxes, leases, easements, mortgages or other issues or restrictions that could impede the real estate transaction. They will also ensure that the property has a clear and proper chain of ownership, whether that be by sale, through a will, or as a gift to the person that was intended to receive the property. Once a title has been agreed to be clear by the buyer and lender and the title valid, the title insurance company can proceed to issue title insurance
Do I Need Title Insurance if a Title Search Has Been Performed?
A thorough title search may seem like enough of an assurance that the title is free of claims and defects. However, the reason to purchase title insurance is not to protect yourself against known problems. Those can be dealt with. Title insurance’s purpose is to protect against unknown or unforeseen defects. Defects like forgeries, fraud, recording errors or missing heirs can be extremely difficult to uncover during even the most rigorous title search done. Buyers often have no way of detecting a title problem before it comes to light for these reasons. Title insurance is the strongest safety net against these hidden risks.
The Risks of Going Without Title Insurance
Going without title insurance exposes the parties involved in the real estate transaction to serious risk. The common example is a home buyer purchasing a home and after closing, finding out that the previous owner had unpaid property taxes. Without title insurance, the burden to pay those taxes falls squarely on the shoulders of the new owner. If they cannot pay, they risk losing their home to whoever those unpaid property taxes belong to.
Hazards Covered in Title Insurance
The typical hazards a basic title insurance policy will cover includes the following:
- Claims of ownership by another party
- Flawed or missing records or inappropriate record keeping
- Judgments or encumbrances on the property, like pending lawsuits or outstanding liens
- Improper signatures
- Forgery of documents
- Unrecorded interests by a third party
- Problems associated with a will
While title claims are rare, they can be devastating without title insurance. The problems title insurance protects against are usually claims would be highly unlikely to be caught with a title search alone.
The Cost of Title Insurance
In New Jersey, title insurance is regulated by the state’s Department of Banking & Insurance. The NJDOBI regulates all title companies within that specific state. This means no matter which title company you use, the title premium will be the same and this applies to both owner’s policies and loan policies. The price will change based on a variety of factors related to the property such as the price of the property or the expected cost of defects. Since lenders’ and owners’ title insurance is usually required in order to properly mitigate risk for all parties involved in the transaction, they can often be purchased simultaneously at the time of closing as bundle at a reduced cost.
Frequently Asked Questions About Title Insurance & Closing
What is Title?
Title is your legal right to own or use your property. Title also establishes any limitations on those rights.
What is Title Insurance?
Title insurance guarantees the policy holder (you, the individual, or the lender who holds a mortgage on property) marketable title, or title free from the threat of doubt or litigation. If a policy holder has title insurance, they are insured to convey the property to another without defects or encumbrances.
Why Do I Need Owner’s Title Insurance?
Your home is likely to be your biggest expense and investment, and owner’s title is an important step in protecting it. For a one-time fee, your property rights to your home will be protected from unforeseen problems for as long as you or your heirs own it.
What Types of Problems Can a Title Search Uncover?
When a title agency performs a title search, they search real estate records in the county where the property is located. This can uncover any issues with the property, such as:
- Any judgments, mortgages, unpaid taxes, or liens that need to be cleared before the property can be sold.
- Any existing restrictions, easements, or leases affecting the property.
What Will My Title Insurance Policy Protect Me From?
Title insurance protects your property from any potential unknown defects or problems that may arise in the future. This includes issues that even an extensive title search would not uncover, including:
- Forged, falsely executed, or improperly recorded legal documents, including deeds, mortgages, or wills.
- A previously unknown heir of a former owner claiming they own the property.
- Errors in tax records.
- Any legal action pending against the property.
What is the Difference Between the Standard and the Enhanced Policy, and Which do you Recommend?
Policy holders have the option between Standard and Enhanced insurance policies. An Enhanced policy covers several issues that a standard policy does not. This includes building permit violations, living trust coverage, forced removal of structure, zoning restrictions, and more. It is a good idea to discuss the difference between these two policy types with your title agency and determine which is best for your property.
What Happens at a Closing?
A closing is the last step in buying a home. At the closing, you and all of the other parties involved in the transaction sign all of the necessary documents. This may include some combination of:
- Your realtor or real estate agent
- Your title and/or escrow company
- Your attorney
- The seller
- The seller’s attorney
- Your mortgage lender
Depending on the circumstances, all of the relevant parties might meet and sign the documents at one meeting, or the closing could take weeks as signatures are collected separately. Once the closing is complete, you officially own your new home.
What Should I Bring to My Closing?
You will need to bring:
- Copies of a valid driver’s license for each person who will be signing documents.
- If you don’t have a driver’s license, some form of official photo identification is required.
- Some lenders require two forms of identification, so it is a good idea to bring a second form, such as a social security card, school ID, or work ID.
- Proof of insurance, along with a proof of payment.
- The final purchase and sales contract
- Any payment you owe, such as down payment or closing costs.
Which is Safer, Sending a Wire Transfer or Bringing a Check?
A wire transfer is the preferred method of payment for transactions involving large amounts of money, such as a closing. It is important to work with an experienced and reliable title and escrow company, and take the appropriate steps to protect yourself from wire fraud and cyber theft.
How Do I Protect Myself and My Closing from Cyber Theft?
There are several steps you can take to protect yourself from cyber theft, including:
- Carefully examining the email address from which you receive any updates on your transaction from your real estate agent, settlement agent, or escrow company.
- If an email seems suspicious, notify your contact immediately in person or over the phone.
- Be wary of any email requesting a change in wire transfer instructions. Contact your escrow company or settlement company over the phone or in person immediately to verify the instructions.
- Avoid providing any information about yourself or your transaction to anyone except the necessary, verified parties.
- Contact the appropriate party immediately if you do not receive funds in a timely manner. Monitor your bank account for any suspect charges.
New Jersey Title Insurance Made Easy
Buying a new home is stressful and complex process. Because the price is fixed by the state of New Jersey, you will want to choose a title company based on how experienced and meticulous their staff is and whose service will help guide you every step of the way. Based in Red Bank, NJ, Scott Title Services is that title company. And if the unforeseen does happen, we will stand by you to fight for your home.