Whenever you buy a house, you deal with different people, such as a settlement agent, real estate agent, escrow agent, and title company. A title company is there to verify that your title to your real estate is given legitimately to you, the home buyer. Ultimately, it makes sure that the seller has the right to sell the property to you.
Once the title insurance company verifies everything, it backs it all with title insurance. This protects the lender and property owner in case someone lays claim to the property later.
With that, the title company is also responsible for handling the closing process. As a neutral third party, it maintains the escrow accounts where the closing costs are kept. When you close the loan, it closes the escrow account for you.
Sometimes, title companies don't deal with the closing needs. Therefore, you need one firm to handle the title insurance and another for closing.
Here, you can learn all about title insurance and how to choose the right company. Though Rocket Mortgage is one of the most popular, it isn't the only one. Let's dive in!
Difference Between a Deed and a Title
One confusing thing about the signing process on your closing day is the difference between a deed and a title. Many people don't understand how they are different, but you need both and must learn about them.
A deed is the legally binding document that is used to transfer property from one person to another. Once you close on the house, it's signed and witnessed so that it can be presented to you as the new homeowner. It often contains a property description, so everyone understands what's been transferred.
All real estate transactions require this. However, the title is the documentation that says you own the property. If your name is on it, you must sign closing documents and all the documents related to your mortgage, even if you're not on the loan.
Some states that go by community property rules require you to sign the documentation even if you aren't on the title. This is because you've got some ownership rights as the spouse. A title company can help you draw up the documents and fill them out.
What Title Companies Do Before Issuing Title Insurance
Now that you know what the deed and title are, you must understand what title companies do to issue title insurance and ensure that you have a full ownership claim to the property.
The title company issues title insurance once it knows that everything is legitimate. Remember, the title company must protect itself from liabilities in the future.
Perform Title Search
Title research is the first thing the title company should do. A title search looks for any obstacles that prevent a clean ownership transfer.
This is a title search of public records and looks for these issues:
- Outstanding Mortgages - If the buyer's previous home is not owned free and clear, they have a mortgage on the property. That must be paid off at closing to transfer the property title of the new place to them.
- Other Existing Liens - There could be a lien on the property for loans and home equity lines of credit. You must pay them off before closing.
- Unpaid HOA Dues - This depends on what's in the Homeowners Association contract, but the association could give itself the power to put a lien on and foreclose on the property if you don't pay your HOA dues.
- Judgments and Unpaid Taxes - If a previous owner didn't fulfill their responsibilities, they could be taken to court where the judgment stays with the property instead of the person. Title searches find this effortlessly. One scenario for this could be if the contractor didn't get paid. With that, the IRS could put a lien on because of unpaid property taxes.
- Restrictions - When there are restrictions of free transfer of ownership in property titles, this causes a problem. Examples include being over a certain age to live there or belonging to a specific group.
- Easements - These are agreements that say you own the property and give another person the right to use it for a specific purpose. For example, you may allow others to use the area for parking.
- Leases - A title search can find out if the property is rented to someone for specific terms.
If anything comes up in the search, it might be best to speak with a real estate attorney about how to proceed. While places like Rocket Mortgage have their own lawyers, these professionals don't work for you.
Conduct a Property Survey
Insurance title companies can order a drawing or survey of the property. The goal here is to find out about potential encroachments and verify that this home is within the set boundaries. One example is if the neighbor's addition had accidentally been built on your property.
Encroachments could be potential problems if any damage was caused. Typically, the title company must take all of that into account and insure itself against it.
While there are exceptions to the encroachment policy, every concern must be looked into. Therefore, you may require an endorsement of this exception by the title company, which could cause a delay.
Prepare Title Abstract and Title Opinion Letter
A title abstract is the legal document outlining the ownership history of the property. It covers when the property was sold, inheritance records, court litigations, and tax sales.
The opinion of title is written by your title company. This document states that they feel the seller is valid and are comfortable offering you title insurance for a refinance or purchase.
What's Title Insurance?
When it's time to insure the title, it's crucial to understand that there are different title insurance policies - the owner's title policy and one for the lender.
Title insurance protects you from someone laying claim to the property after you purchase it. This doesn't focus on the purchase price at all because this is worked out between the buyer and seller.
If you get a mortgage online or in person, the lender's title policy is necessary. The buyer pays for this in most cases, but the seller may be required to do so based on local customs.
You don't require an owner's policy, but it protects your investment. Many people recommend getting both from a title company.
Lender's Title Insurance
Most lenders require you to pay off your mortgage on time. However, problems arise when there are title issues later, and you lose that house. The terms of your contract determine what happens, but you are usually not required to pay more to the mortgage company if you lose the house over a dispute.
Mortgage lenders require lender's title insurance for that reason. That way, if something goes wrong, the lender's policy covers the amount of the loan.
It's crucial to realize that it is required but that the lender's title insurance policy doesn't protect whatever equity you have in the home. If another person challenges you and it's ruled they have a legitimate claim to that title, the mortgage lender receives its investment back, and you are without a home.
Clearly, the lender has a financial interest in this, and the lender's policy is there to protect it. Therefore, lender's insurance is a necessity.
You are required to pay for the lender's title insurance through the title company. However, you need protection and should also invest in an owner's title insurance policy.
Owner's Title Policy
In contrast to the lender's policy, the owner's title insurance policy provides you with more protection for the equity built up over the years and months you've owned the home.
For example, someone lays claim to the property and can prove that the seller transferred it without the right authority. You must move out, but your owner's title policy gives you the money you put in to buy another house.
This isn't ideal for anyone. However, this is also why the title company works so hard to do the property survey and title search before it signs off on it.
How Much Does Title Insurance Cost?
Title insurance comes as a one-time fee, and it's roughly 0.5 percent of that home's purchase price. The average price for lender's title insurance is about $544. For the owner's title insurance policy, the average is about $830, making it a total of $1,374.
Many things impact the title insurance cost. The biggest factors are the price of the home and the loan amount. Large loans mean a bigger insurance payoff from the title company if something goes wrong.
To compensate for the risk, most title companies charge you more. The title insurance cost may also depend on your credit score and geographic location. Typically, though, you can save money if you bundle the owner's and lender's policies together.
Do You Require Owner's Title Insurance?
The decision to get an owner's policy is up to you, but there are reasons to consider spending extra money with the title company to protect yourself:
- Many Owners - If there's a long line of owners from the past, there's a bigger potential for someone to claim your house.
- Can't Afford Legal Fees - Hiring a real estate attorney means accruing many legal costs. Even if there's no merit to the claim, you must still pay to hire someone to fight it.
- Peace of Mind - When you have a policy from a title company, you know that the home is protected. If there is a legitimate claim, you get money to find a new place.
How to Choose the Right Title Insurance Company
Your real estate agent, lender, and lawyer could help you choose a title company and recommend one. However, you should do your own research and shop around to help you save on closing costs.
Make sure that you check out online reviews for each title company. With that, it should provide closing services and title insurance.
You may want to look at different rates and prices of title insurance, but make sure that you're comparing them correctly. Rocket Mortgage is a top title company, with its lending services provided by Rocket Companies.
Understanding how a property title works is the first step. As the new owner of the home, you want to ensure that the house title is free and clear. It takes a long time to find the best real estate investments, and you want to protect yourself.
Therefore, it's a good idea to get title insurance from a reputable title company. It's safer and gives you more peace of mind.