Buying a home may be the single greatest investment you make. There's a lot that goes into this transaction, which is why many homebuyers choose to purchase title insurance in case there are any issues with the home's title such as an unknown lien or forged document. There are many checks and balances that go on behind the scenes of a real estate transaction that will be foreign to someone who isn't a licensed professional. Title insurance is just one, of many, areas a top real estate agent will help you navigate.
What Is Title Insurance And Why Should You Care?
A title insurance policy is simply an insurance policy that protects you, the buyer, from any unknown variables that could threaten your ability or right to occupy the property. Unlike car insurance or health insurance, title insurance is a one-time payment that occurs when ownership of a property is transferred. A title insurance policy is a form of indemnity insurance that is designed to protect the lender and buyer from a financial loss resulting from an issue with the home's title.
Common issues with title include:
- The former owner owed back taxes
- The home has an unforeseen or unknown lien
- The real estate transaction documents had a flaw or intentional fraud.
In the event, these variables were present with the seller, as the new homeowner, you may lose your home, or owe money, due to issues with the previous homeowner's title or background.
Before buying a home, a title search will be completed on the property by your title company. However, title searches are not bulletproof. In many cases, they are not able to pull all the property records, and all the history, on a particular home. Mistakes do happen, things are missed, and when they are - that's when title insurance saves the day. If there are any issues that were not found during the title search, an insurance claim is made to step in and bridge the gap.
What Kind Of Title Insurance Should I Buy?
There are two types of title insurance:
Lender's title insurance
This is title insurance that will protect your lender. In all real estate transactions financed using a mortgage, the lender will require you to obtain title insurance to satisfy the loan. Therefore, if anything happens with the title after the purchase is complete, the lender will not lose money.
Owner's title insurance
Now that the lender is covered, it's time to worry about you, the new owner of the property. The owner's insurance policy does the same thing, but instead of protecting the lender, it protects you from any liens or mistakes preventing clear title.
What Does Title Insurance Protect Buyers From?
Title insurance is designed to protect a buyer from losing their home or owing money due to actions the seller took. Homeowner's insurance will protect your home against fire, theft, flood, or various damages to your home due to an act of God. Title insurance on the other hand won't cover those things, but it will cover a wide range of variables that could jeopardize your home.
A homeowner who elects to purchase title insurance will receive protection in a lot of areas. Most commonly, folks are looking for protection from:
- Forgery and fraud of documents
- Coverage against any document that was not properly created, witnessed, sealed, documented, or executed
- Any document that was created or executed under a falsified or expired power of attorney
- Errors in tax records
- Undisclosed heirs
- False impersonation of the true landowner
- Probate matters
- Adverse possession
The full list is rather compressive. If you're interested in understanding the full scope of coverage, be sure to check with the insurer.
Who Pays For Title Insurance In Tennessee?
Considering title insurance is just one of many closing costs in a real estate transaction, is the buyer or seller responsible for paying it in Tennessee? In Tennessee, it's most common for the seller to pay for title insurance. Call it tradition but there is no rhyme or reason why the seller typically pays for it in our state. For example, in some states, the buyer pays for title insurance, or the cost is split evenly.
Here in Tennessee, in about 5% of real estate transactions, the buyer will offer to pay for title insurance. While this is fairly rare, it occurs when a home is listed and receives a ton of interest from multiple buyers. In a bidding war, some buyers may elect to offer a higher sales price while others may sweeten their offer by choosing to pay for title insurance.
Is Title Insurance Required In Tennessee?
While not required by law, if you are planning to finance the purchase of your home with a mortgage, a bank or lender will require title insurance on their behalf when purchasing a home in Tennessee. However, as the new homeowner, you can elect if you personally want to have the protection of title insurance for yourself. This is referred to as an owner's policy. Although the owner's title insurance policy is optional in Tennessee, it's crucial and something you don't want to be without.
How Much Does Title Insurance Cost In Tennessee?
We've already clarified that in Tennessee, the seller in a real estate transaction is typically the one who pays for title insurance. What can they expect to pay as a title insurance premium? Unfortunately, this isn't a one size fits all approach. There are a few variables that must be factored into the equation. For example, the sales price of the home will be a major variable in determining how much the insurance premium is. The county in which the home is located may also play a factor. Additionally, each title company can charge their own rates. Therefore, the costs may vary between different insurance companies.
A common example would be a 0.70% charge for every $1,000 your home cost. Therefore, if the price of the home was $360,000, and your mortgage is $300,000, your title insurance would cost $2,100. The $60,000 down payment would be deducted from the total price of the home, reducing how much insurance you need to carry.
Should You Elect For Owner's Title Insurance?
An owner's title insurance policy is something we'd recommend you ask the seller to purchase on your behalf. The risk of having anything happen to your property just isn't worth it. You don't want to lose your home due to bad decisions made by the previous owner. Make sure you protect this great purchase you've worked so hard for and ensure it is properly insured. After all, having the seller pay for this upfront will likely be cheaper than the various attorney fees if there were any issues and you were uninsured.
What Is A Lien On A Home?
The definition of a lien is - the legal right or claim from a creditor to obtain access to the property if debts are not paid. But beyond that, we'll break liens into two categories; good and bad liens. We'll keep it high level and dive into both.
A good lien
Also known as a 'normal lien', a good lien is a home equity line of credit or mortgage. Whenever you're buying or selling a home, you'll likely be dealing with these common liens. In the event, the existing homeowner fails to pay their mortgage on time, or in full, the lender has a lien on your home. This means if you defaulted on your loan for a given period of time, the lender will have the right to assume ownership of the home. You may have heard the term foreclosure before. That is when a bank or lender will try to sell a home they've taken over due to a lien, or someone not paying the bills.
A bad lien
Or an undesirable lien would be when the previous homeowner has outstanding bills with various companies or institutions. For instance, there can be a city tax lien for back taxes, a water bill lien for unpaid water bills, utility liens, etc. If you were to buy a house with these liens attached to them, you can be responsible for paying the unpaid bills in full. You'll certainly want to discover this before buying the house.
How To Determine If There Is A Lien On A House?
A simple title search can typically uncover any liens on a home. Luckily as a homebuyer, you do not need to worry about conducting the title search yourself. During the closing period, the real estate attorney or closing company you hire will be in charge of running a title search, resolving any outstanding liens, and ordering title insurance on the property. Most closing companies charge a one-time fee of $300-$500 for this service.
Is Title Insurance A Scam?
There is an ongoing sentiment among home buyers and sellers that title insurance is a ripoff. Title insurance has a bad reputation because, like most insurance products, it is a waste of money until you need it. Unlike other insurance products like car insurance or health insurance, title insurance is historical. For example, you may not know if your car will be in an accident in the future which is why it's important to have auto insurance. With title insurance, a title company can run a search to see if there are any liens on a home before issuing a policy. This has caused the claims rate in the title insurance industry to be extremely low, around 5%. With such a low claims rate, you would expect the cost of title insurance to be relatively low. Unfortunately, title insurance costs have been on the rise thanks to industry consolidation. There are only two primary title insurance underwriters, Fidelity National Title, and First American Title who set the price of these policies.
Need Help Buying Or Selling In Tennessee?
There's a lot that goes into buying or selling your home. Some folks choose to take on this challenge themselves, but like most things in life, it pays to hire a professional. You want to be sure all your bases are covered and you aren't missing anything important. Having the right licensed real estate agent in your corner, who is local to your market, can be incredibly helpful.
As a seller, you may be stuck with the bill for title insurance but that doesn't mean there aren't other ways to save on closing costs. At Felix Homes, we charge a 1% listing fee compared to the 3% listing fee most agents charge. We're a low commission real estate agent, also known as a 1% realtor, and we've been saving our clients roughly $8,100 in commissions on average. We understand how important it is for homeowners to walk away with as much equity as possible, and our goal is to help you keep more of it.
Whether your buying or selling a home in Tennessee, our agents will be happy to help you. We want to make your transaction as easy and seamless as possible, and we're able to do so given our experience. We're happy to discuss title insurance or any other closing cost you'll be expected to pay when you buy or sell a home. Email us at firstname.lastname@example.org or give us a call today and 615-354-5731.