What to Expect When Buying A Home: The Critical Importance of Title Insurance
Whether you are new to the home buying process or you have previously purchased a home in a different state, you may wonder how the closing process works in North Carolina. One key component that distinguishes North Carolina from other states is that attorneys – rather than title companies – facilitate residential real estate closings.
Attorneys are charged with conducting title searches and providing an opinion as to whether title to a property is free and clear, identifying outstanding liens attached to the property, and verifying that property taxes are current. Title insurance companies rely on the closing attorney’s opinion when issuing a policy to the new owner.
This all begs the question: if the attorney completes a thorough title search to verify the title is free and clear to transfer, what is the purpose of title insurance? Why is there so much buzz about it in the residential real estate world? Is it really necessary, or is it just an extraneous expense?
Here, we will explain what title insurance is, why you need it, and how much it will cost you.
What is Title Insurance?
Title insurance is a tool that protects buyers. Few buyers can afford to not have it. At its most basic level, a title insurance policy protects buyers from unforeseen title disputes such as a defective title, encumbrances, tax liens, old mortgages, and even the unknown heir of a previous owner who claims ownership. A variety of issues can – and often do – surface post-sale, such as:
· Forged title documents
· Unpaid taxes
· Filing errors
· Unknown errors claiming ownership in the property
· Inconsistent/conflicting wills regarding who should be given the property
· Liens – usually from unpaid home equity lines of credit or unpaid contractor bills
· Undocumented easements
Title insurance is the antidote to these scenarios. If a title dispute arises after closing, the insurance company will absorb the costs. If you lack title insurance, you will need to engage an attorney to fight the issue and if you lose, you may be forced to relinquish the property or pay damages.
Who Does Title Insurance Protect?
There are two types of coverage: Lender’s Coverage and Owner’s Coverage. Virtually every lender in our State requires a Lender’s policy on (most) real estate transactions. This means that lenders are aware of the impact of a lurking title defect in real estate transactions and as such, rely on title insurance policies to protect the money they loan buyers for the purchase price of the property. An Owner’s policy protects buyers by covering their interests, including protection of the property’s total purchase price. It will also include payment of legal costs required to defend the title should defects or disputes arise, as well as claims up to the policy’s coverage limits.
Do I Need Title Insurance?
Though a real estate attorney will run a title search before completing the purchase of the property, title issues may still arise. To illustrate, here are two scenarios real estate attorneys frequently see play out in purchase and sale transactions:
Alleged heirs to the property claim a stake in it.
Shortly after buyers close on a property, they receive a letter from someone claiming to own the property. The letter explains that the person who sold the property did not have the right to do so. If the buyers have title insurance, they can file a claim and ask the insurer to pay the damages. Otherwise, they may be forced to cover the costs themselves.
A contractor claims to have a lien on the property.
After purchasing a home, the buyers receive a letter from a contractor asserting a lien for $100,000 – which should have been satisfied from the sale proceeds. The buyers did not know about the lien and it did not surface in the title search. If they are properly insured, the buyers’ policies can save them the expenses required to fight the lien and defend the title to their property.
Title insurance is worth your money: when you take the time and commit the funds to purchase a home, title insurance will protect both your investment and your property interest.
Isn’t Homeowners’ Insurance Sufficient?
Your homeowner’s policy will not protect you in a title dispute or any related loss. Homeowners’ insurance protects the property owner and lender against any loss caused by fire or other natural disaster, whereas title insurance only covers the title to the property, providing coverage for unforeseen defects.
Just like claims under your homeowner’s insurance policy, you may never need to file a claim under your title insurance policy. However, insurance is intended to protect you from the unexpected, and title insurance is no different. Title insurance will provide peace of mind that when you purchase your home, you will not have to worry about anyone calling your ownership rights into question.
How Much Will Title Insurance Cost Me?
Unlike other insurance policies that carry fluctuating annual premium amounts, title insurance is generally a one-time expense written into the final price of the purchased property. While you have an interest in the property, that one-time expense will cover you, except in a few limited circumstances (for instance, if you refinance or purchase an additional property).
In many transactions, buyers ask the property sellers to cover the cost of insuring the title as part of the seller-paid closing costs. While cost varies, it is typically around two percent of the purchase price, making it a very affordable option to secure your interest in your new home or property purchase.
Experienced North Carolina Real Estate Attorneys
If you have specific questions about title insurance in your real estate transactions, reach out to one of our attorneys for a consultation. At Strauch, Green & Mistretta, we are committed to delivering the best possible results for our clients and take pride in offering superior legal counsel. Give us a call or reach out to us online to learn more.
This article does not establish an attorney-client relationship and must not be construed as legal advice.