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Difference Between Homeowners Insurance and Title Insurance

Becoming a homeowner can be one of the most exciting events of a person's life. At the same time, it can be very confusing, too.

There are a lot of steps in the process of purchasing a home, and many different hurdles you'll have to get over before you sign on the dotted line.

As you progress toward the final steps of the process, you'll likely be confronted with two different types of insurance that you will be required to get -- homeowners insurance and title insurance. While both policies will protect you and your interest in your new home, they work in very different ways.

It's important to understand how these insurance policies work and why each is necessary as part of the homebuying process. Below is a more detailed description of each so you can understand the similarities and differences.

Homeowners Insurance

Homeowners insurance will protect you from any unforeseen issue that might arise at your property after you purchase your home. It doesn’t go into effect until you are the rightful owner of the home.

While your mortgage company likely will require to you secure sufficient homeowners insurance before approving your home loan, including the first year's worth of premium upfront, the effective date will be the day of your closing.

What Homeowners Insurance Protects

Homeowners insurance protects you in case anything happens to your home, other structures on your property or any person on your property. Typically speaking, a homeowners insurance policy will cover:

  • Cost of repairs due to exterior or interior damage to your home
  • Cost of repairs due to damage to other structures on your property such as a fence, detached garage or shed
  • Cost of finding suitable housing elsewhere while your home is repaired (if necessary)
  • Personal belongings lost due to weather, damage or theft
  • Liability for any lawsuit that someone else brings against you if they were injured on your property
  • Cost of replacing your home should it be destroyed

What Homeowners Insurance Covers

Homeowners insurance will cover events that occur to your home or property that could not have been prevented. This includes weather-related events such as hail, wind, snow/ice and lightning; theft or vandalism; and smoke and fire.

There are some weather-related events that typically aren't covered by a standard homeowners insurance policy, such as floods and earthquakes. You could opt to purchase separate flood insurance, for instance, if you live near a body of water, and you could even be required to do so depending on where you live.

Homeowners insurance also won't cover damage your home or property sustains due to a lack of preventative maintenance. 

The Paying Party for Homeowners Insurance

The buyers in a real estate deal will be the ones who will purchase the homeowners insurance. Since it protects the buyers once they own the home, they will be the ones responsible for carrying the insurance policy.

As mentioned before, many mortgage companies will require proof of a purchase homeowners insurance policy before closing, and many will also require the first year of the premiums be paid in full. After that point, the homeowners insurance premiums can be paid on a monthly basis as part of escrow payments.

Buyers will have a choice in what company to purchase the homeowners insurance from, and what levels of coverage they purchase. The mortgage company will typically require the policy cover at least the full value of the replacement of the home, to protect their interest in case you default on your mortgage.

Some sellers will offer a limited warranty on the property, which will be transferred to the buyers once the sale is finalized. This is not to be confused with a homeowners insurance policy, though.

It's a separate and additional insurance policy that a seller may offer as a sign of good faith and added value to buyers that would cover repairs if things such as major appliances break within the first year of home ownership. 

Title Insurance

In contrast to homeowners insurance, title insurance will cover your rights to a property. This insurance policy will help you prevent risk as opposed to homeowners insurance, which covers you for risks you have assumed after you bought a home.

In essence, title insurance protects people who are buying a home from issues from the past that could affect their ability to either use or own the property.

What Title Insurance Protects

One of the final steps in the homebuying process is verifying clear title on the property in question. The title agent will conduct various searches through public records to verify this.

Before your closing day, the title agency will order a professional title search to be conducted, during which they will look for any defects in the title. This is very important, because once a home purchase has been completed, the new homeowner will assume everything that comes along with that home and title.

For example, if a lien on the property was discovered after the purchase was completed, the new homeowner would be responsible for meeting the obligation of that loan. That could cost quite a lot of money and cause quite a lot of headaches in the process.

What Title Insurance Covers

There are many different things that title insurance covers. Some examples of a title defect that would be covered by title insurance include:

  • Delinquent taxes
  • Any unknown easement
  • Any survey dispute
  • Any forgery or false impersonation of any previous owner
  • Liens for things such as spousal or child support
  • Any error made in public records

There are other defects in title that this insurance policy would cover should they arise after the home sale has been completed.

The Paying Party for Title Insurance

While title insurance protects the purchasing party in a real estate transaction, the seller may opt to pay for it in some cases. They may do this as a sign of good faith and to add more value to the deal, just as a home warranty would.

However, the location of the home and real estate transaction could dictate which party is required to pay for the title insurance. Your real estate agent, mortgage company and title agency should all be able to inform you of the rules and regulations of your state.

 

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