Real estate purchases are massive transactions. Not only do they typically involve six- or seven-figure sale prices, but they take weeks if not months to complete. Buyers sometimes overextend themselves by offering the absolute maximum amount they can finance for the purchase of real property.
They may then end up scrambling to cover closing costs, which can add thousands to the total amount of capital that they must bring to the table. When looking at the settlement statement explaining the breakdown of costs, buyers may notice that they must invest thousands of dollars in title insurance premiums. In fact, they likely have two separate policies included on the settlement statement.
Why do those buying real property need to pay for title insurance?
Title insurance protects a buyer’s investment
A significant amount of money changes hands during a real estate transaction. Buyers provide earnest money and a down payment. Lenders fund the balance of the purchase price. Those funds could be at risk if a title claim later arises.
Title records affirm the right of an owner to access and control real property. In some cases, other people may claim to have an interest in the property after a real estate transaction occurs. Should that title claim prove successful, the buyer could lose their home and the money they invested in it due to inaccuracies in title records.
Title insurance helps protect against that situation. Before issuing a title insurance policy, title companies conduct a thorough title review, looking at ownership records and other critical details about the property’s history. The title policy issued by the company can pay for the cost of legal representation when responding to a title claim.
If the buyer loses their right to the property, title insurance can compensate those who have invested in the property. Mortgage companies typically require that buyers purchase a lender’s policy. Buyers typically also buy a policy that protects their investment.
Sometimes, buyers hoping to reduce their closing costs may consider foregoing their own title coverage. However, choosing not to carry a title policy can be a risky decision. The chances of a title claim are low, but the consequences of title claims are catastrophic if they are successful.
Understanding the purpose of different closing costs can help buyers make the right decisions as they prepare for real estate transactions. Title insurance may be costly, but it is mandatory in many cases and valuable most of the time.