What’s the Difference Between Homeowners’ Insurance and Title Insurance?

While many homebuyers do their research before diving into the homebuying process, it can still be a very confusing experience due to the sheer amount of information involved. The homebuying process, coupled with today’s competitive market, can pressure homebuyers to speed through parts of the journey without a deep understanding of what they need, or in some cases, don’t need.

A recent survey by Qualia found that only 1 in 5 homebuyers understand the documents presented to them during the closing process. In our recent interview with two experts from the title industry, Andi Bolin and Linda Grahovec, we examined a gap between title agents and homebuyers that they are trying to reduce.

One specific area mentioned was that many homebuyers don’t fully understand what title insurance is and why it’s so critical to protecting their property rights. Part of the issue is the lack of digestible information while the other part is that title insurance is easy to confuse with the many types of insurance available, especially homeowners’ insurance. 

Both homeowners insurance and title insurance are there to protect a homeowner from significant issues related to their investment, but does everyone understand the difference between the two? We’re diving into these two forms of insurance so that homebuyers can feel empowered when it comes time to decide on the policies available.

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What is Title Insurance?

In the simplest terms, title insurance protects your property rights. It is a unique form of insurance that emphasizes risk prevention rather than risk assumption. While a homeowners’ insurance policy protects the physical and tangible assets of a home, a title insurance policy protects new homeowners from any past issues affecting their right to own and use the property.

How Does Title Insurance Work?

When buying a home, it is essential to verify that the sellers have the legal right to sell the property and make sure that the history of the home’s record is clean. Title agents and real estate attorneys work in the background to reveal any problems, or title defects, before closing, but sometimes recording errors and fraud don’t come to light until later.

A title search helps verify three main areas related to the property:

• Does a seller have the right to sell the property, and is it clear to do so?
• Are there any restrictions or allowances tied to the property?
• Are there any pre-existing liens on the property that need to be paid off at closing?

After closing, the title insurance policy protects owners from financial losses and covers related legal costs to settle defects if any errors come to light. In other words, title insurance policies insure against the past while other types of insurance insure against the future.

What Does Title Insurance Cover?

Much of the information that a title agent searches for is found in the local public record. Before closing, the title agent conducts or orders a professional title search through these records to uncover any title defects. The investigative experience that a title agent has, coupled with access to records that may also not be available to the public, makes a professional title search invaluable to a homeowner.

A title defect can be related to:

• Errors in the public records
• Mechanic’s liens
• Bankruptcies
• Liens for child support
• Liens for past-due spousal support
• Other unknown liens
• Delinquent taxes
• Illegal deeds
• Undiscovered encumbrances
• Unknown easements
• Boundary/survey disputes
• Missing heirs
• Forgeries
• Undiscovered wills
• False impersonation of a previous owner

Where Do You Buy Title Insurance?

Anyone could conduct their own title search, but having a professional title search conducted through a licensed title agent comes with the safeguard of a title insurance policy. Once a title is considered marketable, the title company will issue the title insurance, thus protecting the buyer should the title agent miss something during their process.

Depending on the state, there may be some wiggle room for the cost of title insurance. However, many states have a set price, so homebuyers will often select a title company based on the recommendation of their real estate agent rather than shopping around. Of course, it’s also helpful to do a little research to ensure their recommendation is for a reputable company.

Why is Title Insurance Important?

Without title insurance, the financial burden of an undiscovered lien, for example, would likely fall onto the new homeowner. Liens on a property can rack up thousands of dollars in debt if left unpaid for long periods, so it’s crucial to be protected by title insurance.

Lender vs. Homeowner Title Insurance

There are two types of title insurance offered – an Owner’s Policy and a Loan Policy. An owner’s policy or owner’s title insurance protects the buyer in the transaction, whereas a loan policy or lender’s title insurance protects the lender. In most residential transactions, the lender’s title insurance doesn’t protect the homebuyer, so the owner’s policy is also needed.

The owner’s policy is usually issued for the amount the home was sold for and will remain active for as long as the owner or any heirs have interest in the property. A loan policy is there to secure the lender’s interest in the property before anyone else in the event that someone tries to claim ownership. The initial amount of the policy will match the loan taken out, but decreases in liability as the debt is reduced with time.

Who Pays for Title Insurance?

The person paying for title insurance heavily depends on the local practices, but the seller will often pay for the owner’s title insurance to show confidence that the title is clear of any defects. In other cases, the buyer must request the owner’s policy and pay for it themselves. Lastly, in some places, both the owner’s policy and loan policy will be issued simultaneously.

What is Homeowners Insurance?

Like renters insurance, homeowners’ insurance protects a person from unforeseen issues related to their property. Just like other forms of insurance, homeowner’s insurance can be customized and enhanced, so it’s crucial to fully understand what type of policy will best suit your needs. It’s really a packaged policy that encompasses multiple areas related to your home.

How Does Homeowners’ Insurance Work?

Like most other forms of insurance, a homeowners’ insurance policy is there for possible events in the future. If an accident causes a financial burden, a claim is made to the insurance provider to recoup the associated costs. The insurance company will offer reimbursement that either covers a portion or the entirety of the cost of the damage to your home, someone else, or the costs related to displacement.

Cash Value vs. Replacement Cost

There are two primary types of homeowners’ insurance that handle claims differently. A cash value policy is one where a payout will be issued in the event of a claim based on depreciation and inflation rates. The reimbursement amount for kitchen appliances, for example, will only be a percentage of the original cost of those appliances. If your entire home was destroyed in an accident, you may be left short of the funds needed to rebuild the home because of a rise in building costs, materials, etc.

Although the more expensive policy of the two, a replacement cost policy will offer replacement items that are comparable with your previous kitchen appliances, for example. The same concept applies for the reconstruction of your home. You would receive reimbursement that would allow you to build a similar home to the original.

What Does Homeowners’ Insurance Cover?

There are standard areas that almost every policy offers and some that are specific to the state, especially ones prone to earthquakes, flooding, tropical storms, or other unique situations like high crime rates. Additionally, a standard policy will protect other structures on your property, such as a detached garage, shed, fence, and so on.

The main areas that homeowner’s insurance protects against are:

• Damages to the interior and exterior of your home
• Liability coverage from lawsuits initiated by others
• Living costs while your home is repaired

Damages to Your Home

No one wishes for their home to be damaged during the course of owning a property, but unpredictable weather conditions, accidents, and other events do happen. Home insurance will cover the costs of repairing a portion or the entirety of your home if it is damaged during severe weather.

Basic areas of coverage in a standard homeowner’s policy:

• Fire and smoke
• Lightning
• Wind
• Hail
• Theft
• Vandalism

Poor home maintenance, floods, and earthquakes aren’t typically covered, so it’s important to review your policy and consider a rider (or extension of coverage) if you want better protection, especially in areas prone to those natural disasters. Detached structures on your property such as a gazebo, garage, and shed are also covered in most policies.

Personal Belongings

In the event of a weather-related disaster, similar coverage will apply to your personal belongings as it does for the structure of your home. This includes things such as furniture, clothing, recreational equipment, and other items in your home. 

Depending on the insurance policy, the percentage of coverage will vary, and for more expensive items like fine art and jewelry, the coverage may have a predefined limit. If you own a large amount of high-value items, it is sometimes best to seek an extension of coverage or separate insurance for those items.

Liability Coverage

Another layer of protection through homeowners’ insurance guards against personal injuries to someone on your property. Although it may seem unlikely, if a mail carrier, delivery person, or even a friend were to be injured while on your premises, they can seek legal action against you as the homeowner for the medical expenses. 

Common incidents where this protection applies would be someone being bitten by your pet or slipping on your sidewalk in icy conditions. Again, coverage varies for this part of homeowners’ insurance, so it’s important to review your policy and consider additional coverage if needed.

Living Costs During Displacement

If your home is damaged and inhabitable during the repair process, homeowners’ insurance will cover the costs of staying in a hotel or short-term rental. This layer of protection has its limits but will help offset the expense of an unexpected change of living arrangements.

Why Is Homeowners’ Insurance Important?

The cost to replace a part or the entirety of a home can sometimes be impossible to recover from financially. As a home is one of the most significant investments in someone’s lifetime, protecting its value is crucial. Having homeowners’ insurance helps ease the financial burden of a severe accident that damages your home and personal items, the costs for someone injured on your property, or living costs related to displacement during home repairs or rebuilds. Without coverage, the loss of a home could send a person into financial hardship or force them to start from scratch.

Although both homeowners’ insurance and title insurance are there to protect a person’s most significant investment of their lifetime, the two policies are not the same. Title insurance is there to protect against anything that could affect a buyer’s right to purchase the property. Usually, any issues come from the home’s history, so in essence, it protects against the past. Homeowners’ insurance is there to protect against future events that may occur.

Given that most people live in their homes for many years, it’s essential to be protected on both sides of the timeline. Make sure to do your research beforehand, compare policies and companies, and ask questions along the way. You’ll be glad you did if any issues arise later.

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