Most first-time home buyers are familiar with many types of insurance (e.g., auto, life), but have no idea what title insurance is, and the role it plays in real estate transactions. In the rush to close such transactions as quickly as possible, title insurance is probably the last thing people are thinking about. Find out more here.

• What is Title Insurance?

  Title insurance helps provide home buyers and/or mortgage lenders protection against losses resulting from unknown defects in the title to your property that existed before the closing of a real estate transaction. Those unknown "deficits" could be:

  • Outstanding liens on the property (e.g., unpaid real estate taxes by a prior owner)
  • Encumbrances (anything that might hinder the owner's right of ownership; e.g., errors or omissions in deeds, undisclosed errors, fraud, forgery, mistakes in examining records)

  These deficits can result in additional costs in the future or even invalidate a home buyer's right of ownership in the property. They might also invalidate the lender's security interest in the policy. Title insurance policies cover the insured party for any covered losses and legal fees that might arise out of such problems. 
  
• What Do Title Insurance Agents/Companies Do?

  Title insurance agents/companies search public records to develop and document the chain of ownership of a property. If any liens or encumbrances are found, the title company might require a home buyer to eliminate them before issuing a title policy. Title insurance agents might also hold money in escrow and perform closing services for an additional fee.
  

  
  

• How Does Title Insurance Work?

  Title insurance policies are indemnity policies — typically, they protect against losses arising from events that occur before the date of the policy, which is the date of closing. This is different from other types of insurance policies, such as auto or life insurance, which protect against losses resulting from accidents or events that occur after the policy is issued. A title policy is usually paid for with a one-time premium that is handled at the closing of the real estate transaction.
  

  
  

• Who Needs Title Insurance?

  Lenders — If a mortgage is obtained in order to purchase property, nearly all lenders require that a  home buyer purchase the lender's title insurance policy for an amount equal to the loan. A lender's policy is issued to a mortgage lender. The policy gives the lender protection from covered losses arising from any defects in the title that have become known only after the insured property has been financed. The lender's insurance policy will remains in effect until the amount financed has been repaid, the property is resold or refinanced.

  Owners — Either a home seller or home buyer may buy an owner's policy. In many areas, sellers pay for owner title policies as part of their obligation in the transfer of title to the home buyer. The question of who pays for the owner's policy can be negotiated as part of a purchase agreement.

  An owner's policy is issued to a home buyer. It protects the buyer from covered losses arising from any unknown defects in the title that existed before the purchase which become known only after ownership of the property is acquired. Your owner's policy remains in effect as long as you own or maintain an ownership interest in the insured property.
  

• Marketing and Sales Practices

  Although home buyers are free to shop around for a title agent or a title insurer, many home buyers do not. Because buyers are unfamiliar with title insurance, they tend to let lenders and/or real estate professionals who are parties to the home buying transaction make that decision.

  Conflicts of interest can occur if the entities making the decision have a financial interest in a title agency/title company. Section 8 of the federal Real Estate Settlement Procedures Act (RESPA) prohibits people involved in a real estate settlement process from giving or accepting kickbacks or referral fees.

• Key Points to Remember

  Although a title insurance company will most likely be offered to you during the mortgage transaction process, you are not obligated to use it.

  • Be sure to ask what services and fees are included in the title insurance premium and any fees (e.g., cost of search and examination, closing services, etc.) that may be billed to you separately.
  • A lender policy only covers a lender's loss. It does not protect a home buyer from losses arising from defects in title. Talk with a local, reputable real estate attorney not involved in the real estate transaction to find out if it is in your best interest to purchase an owner's title insurance policy.
  • Make sure to ask about any available policy discounts. Premium discounts might be available if both owner’s and lender’s policies are purchased from the same title insurance company or if you are refinancing your loan.  You might also ask about “substitution” or “reissue” rates, which might, for example, permit you to use the seller’s title insurance policy to get a more favorable rate than might otherwise be available.
  • Read all title insurance documents you get at closing, including the fine print. Ask questions if any items are unclear; or if any terms, conditions or amounts are not in line with something you may have been told before closing.
  • If you believe that a title/closing agent or title company in a real estate closing/settlement transaction is not following standard business practices (e.g., unexpected or undocumented fees, or requesting that you sign documents relating to the real estate or closing transaction that are not accurate), immediately report this to the Minnesota Department of Commerce.
    

Frequently Asked Questions

Frequently Asked Questions about Title Insurance.

• What is Title Insurance and what does it protect against?
  
  

  The insurance provides protection against insured losses resulting from unknown or undisclosed defects in the title to your property that exist prior to the date of the policy – usually the date your deed is recorded with the county. The title insurer indemnifies you by either curing the defect or paying you the value of the loss you experience. Title defects can result in additional expense in the future, invalidate your right of ownership or invalidate your lender’s security interest.

  
  

  Examples of insured defects may include:

  • Errors or omissions in deeds
  • Mistakes in the county records or examination of those records
  • Fraudulent or forged deeds
  • Undisclosed heirs
  • Incompetency (by age or mental capacity) of previous sellers
  • Someone claiming an ownership interest in your title.

   
• What DOESN’T Title Insurance Protect against?

  Title insurance does not protect you against defects you caused or you had knowledge of prior to the date of the policy and didn’t disclose. It also does not protect you against exclusions or exceptions specifically listed in the insurance policy (e.g., recorded covenants and restrictions that may impact how you use the property). It also does not cover defects that arise after the date of your policy even if those defects do not rise through any fault of your own. Therefore, it is a good idea to discuss title insurance coverages with an attorney or your title insurer/title insurance agent before you close on your real estate purpose.

  
  

• What Do Title Companies Do?

  Title Insurance companies insurers and their agents) sell title insurance and provide related title and real estate services. These services may include the searching and examination of county real estate records; preparation and issuance of the title insurance commitment; assistance with the clearing of any outstanding real estate titles issues in preparation for the closing, and the scheduling and administering of the real estate closing for the parties to the transaction.
  
  

• How Does Title Insurance Differ from Other Types of Insurance?

  Title insurance policies are indemnity policies that protect against losses arising from events that occur before the date of the policy. This is different from other types of insurance policies, such as homeowner’s or auto insurance, which protect against losses resulting from accidents or events that occur after the policy is issued. Premium for title insurance policies is a one-time charge paid at closing.
  
  

• What are Different Types of Title Insurance?

  There are two parts of title insurance policies: a Loan policy and an Owner’s policy. The lender will typically require a loan policy in an amount equal to the mortgage loan. It covers the lender’s interest in the property for the life of the loan. The loan policy protects only the lender and does not protect the buyer.

  The buyer may purchase an owner’s policy to cover their ownership interest for the full value of the property. It protects the buyer from covered losses arising from defects in the title that existed at the time of the purchase. It covers the buyer’s ownership interest in the property for as long as the buyer or his or her heirs have an interest in the property or are liable under the “warranties” of title they may have made when the property was sold. Should someone challenge your title (e.g., your legal rights of ownership) based on an insured risk, the title insurer must defend that challenge and pay all associated costs and loss in property value that might result.
  
  

• Who Chooses the Provider of Title Insurance and Their Related Services?

  Under federal law, the Real Estate Settlement Procedures Act (RESPA), you have the choice to shop for your title insurance and title related services provider and no one can force you to buy title insurance from any particular company. Competing title insurers and their agents (sometimes referred to as title companies) may offer different services, title insurance rates, title service charges and settlement service/closing related charges; so shop and compare – The choice is yours!

  
  

• What to do if You Have a Claim?

  As soon as you discover a title-related problem, contact the insurer listed on the policy itself. Make your claim in writing and include a copy of the policy and copies of all relevant documents including any correspondence related to the claim. It’s always a good idea to keep copies of your claim submission for your own receipts as well. The title insurer is required to promptly acknowledge receipt of your claim and is required to accept or deny your claim in a reasonable amount of time.
  
  

• What are Some Helpful Title Insurance Tips?
  • Make sure the title company you choose is properly license in the State of Minnesota.
  • When comparing cost of providers, be sure to ask that the fees for all services to be provided be included in the quote: title insurance premium, cost of search and examination, closing services, etc.). If a loan and owner’s policy is being quoted, or if you are in possession of a copy of the sellers’ owner’s policy, you should request a quote that includes any available discount rates.
  • A Loan policy does not protect a home buyer from losses arising from defects in title.
  • An Owner’s policy which provides protection to a home buyer from defects in title is optional.
  • A title insurance policy is paid for with a one-time premium, paid at the closing.
  • If you have any questions or concerns regarding your transaction, seek legal advice from a local reputable attorney not involved in the real estate transaction.
  • Review all documents you receive and ask questions if any items are unclear; or if any terms, conditions or amounts are difference from the information you may have received before closing.
  • If you believe that a title/closing agent or title company involved in a real estate closing/settlement transaction is not following standard business practices (e.g., unexpected or undocumented fees, or requesting that you sign documents relating to the real estate that you know are not accurate), immediately report this to the Minnesota Department of Commerce.
    
    
• Where to find more information:

  Title insurance and settlement information: 

  • Minnesota information: www.mlta.org 
  • Nationwide information: www.alta.org and www.homeclosing101.org