Mortgage title problems occur in 25 percent of home purchase transactions, according to the American Land Title Association, making it no surprise that mortgage title insurance exists. Many lenders will require you to obtain it as a condition of approving your home loan.
When you purchase a home, you don't want to learn of lien -- legal claims against the property -- after the fact, but it's possible to purchase a property and learn later that another party has a valid lien against it. Mortgage title insurance provides coverage for the lender in the event of an after-the-fact lien that prevents you from having 100 percent ownership. Such coverage provides the lender with reimbursement up to the original mortgage amount.
A title search, performed before you purchase a home, should reveal any liens against the title that could trip you up later. A title search should also reveal that the person selling the home actually owns it. Most of the time, experienced lawyers or title companies perform computerized searches, but sometimes they must visit local court houses to search records. A search may not reveal, however, if a lien on the property wasn't properly recorded or was illegally transferred by someone other than its rightful owner.
Mortgage title insurance benefits the lender, who wants to ensure that it won't lose its investment in your property if a title search overlooked an issue. The lender may require you to purchase separate title insurance coverage that covers the equity you have in the home. For example, if you put down 20 percent, your personal title insurance will reimburse you for the down payment amount.
When you purchase title insurance, you won't be stuck paying premiums for years -- you can get this bill out of the way in a single payment. In most cases, insurers base your premium amount on your mortgage total, amounting to about 0.5 percent of your loan. As the buyer, the lender typically expects you to foot the bill. Some buyers negotiate with the seller to pay all or part of the premium.
You pay for mortgage title insurance when you close on your home, as a settlement cost. Your lender must approve of the company from which you choose to purchase the insurance, but you can shop around to get the best rate.
- Wells Fargo: FAQ: Title Insurance
- The Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs
- Loan.com: Why You Need Title Insurance and What It Should Cost
- Home Closing 101: How Your Title Insurance Dollar is Divided Up
- American Land Title Association: A Comprehensive Overview of Title Insurance
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