The Role of Title Insurance in Real Estate Transactions: Ensuring a Smooth Closing Process

Real estate purchases tend to be some of the highest-value transactions, and there’s a lot that can go wrong. Whether you’re buying a home or investing in real estate, title insurance provides a layer of protection to help support a smooth closing process.

What Is Title Insurance?

When you buy real estate, you receive the title, which refers to the legal right to own the land. The deed is the actual physical document that attests to your ownership.

Title insurance is a type of insurance that provides protection for certain problems that can occur during the transfer of ownership. Depending on the type of title insurance purchased, title insurance can provide protection for the owner and/or the lender involved in the transaction.

Why Is Title Insurance Important?

In a real estate transaction, you have a seller who agrees to sell the property for a certain price and a buyer who agrees to buy the property for that price. But what if the seller doesn’t actually have the right to sell the property? Or what if someone else claims interest in the property after the purchase has gone through?

According to the Texas Department of Insurance, examples of possible problems include unpaid property taxes, fraud or forgery of previous paperwork and a spouse or unknown heir who claims to own the land.

To avoid these problems, it’s important to make sure the property you’re purchasing has a clear title. However, sometimes problems slip through the cracks. That’s why title insurance is important. Many lenders will require buyers to secure a type of title insurance that protects the lender. Buyers can also choose to purchase title insurance that protects them.

Title Fraud Is a Growing Problem

Imagine finding the home of your dreams, going through the long purchasing process, putting down a large downpayment – and discovering that the actual owner of the house never put it up for sale, and you’ve been dealing with a scammer this entire time.

Title fraud is a growing problem. According to House Beautiful, so-called “title pirates” pose as owners in order to make fast, illegal sales. As real estate transactions have gone digital, it’s been easier for title pirates to pull off their scams.

The FBI explains that this type of fraud is especially easy with vacant land because there’s no one living there to object to the sale. Scammers are often well prepared with fake ID, fake documents, and the address of the real owner.

However, there have also been cases of scammers selling, or trying to sell homes. According to CBS News, a least two homeowners in Massachusetts say scammers tried to sell their homes out from under them. In another case, Realtor.com says squatters allegedly sold a home they were staying in. When the owners were away for an extended period, the squatters reportedly forced their way in and found personal documents that they used to commit fraud.

Who Should Buy Title Insurance?

If you are financing your real estate purchase, your lender will likely require you to purchase lender’s title insurance. However, this policy ONLY protects the lender. If there is a problem with the title, the lender’s title insurance will protect the lender’s interest, but it will not protect the buyer. This is why it’s smart to purchase owner’s title insurance regardless of whether you’re financing or paying with cash. Although owner’s title insurance is optional, if there are any problems with the title, you will likely be glad that you have it.

How Much Does Title Insurance Cost?

When title insurance is purchased, it is typically paid with a one-time payment at closing. The cost can vary, but it is tied to the cost of the property. The more expensive the property, the more expensive title insurance will be. The price tends to be around 0.5% to 1% of the property price. For a $500,000 property, this comes out to around $2,500 to $5,000.

Are Your Assets Covered?

If you’re buying property for your home or business, Heffernan Insurance Brokers can work with you to understand your exposures and recommend appropriate coverage to protect you and your finances. Learn more.