Matt and Jenny were excited they had been saving for years since they were married so they could buy their first home together. They found a great deal on a recently renovated house and put in an offer. While they were filling out the paperwork, they were overwhelmed by all the closing cost items. When their lawyer asked if they wanted the optional title insurance, they turned it down. After all, they already were paying for homeowners insurance, “Why do we need to pay for it twice?” they thought.
They closed the sale quickly and moved in. Everything seemed okay until 6 months later they got a call from their lawyer saying that there was a problem. The contractor that had renovated the house was not paid for the work he did and had put a lean on the home that did not show up when they did their original title search. This meant that there was an extra $40,000 lien on the home that they, as the current owners of the title, were now liable for.
They were devastated. The lawyer explained that he was not responsible for the oversight and if they wanted to fight the lean in the courts, they would have to pay for the extra legal fees out of their own pockets. If they had purchased the title insurance, they would have been fully covered to deal with this problem.
This may seem like an unrealistic scenario, but that is the reality for many people who purchase a home without purchasing title insurance.
What is the difference between “homeowners insurance” and “title insurance”?
“Homeowners insurance” protects you against problems that can happen to the physical property in the future, such as damage from fire, water, wind, vandalism, and a host of other perils.
“Title insurance” protects you against problems that came about in the past that have to do with the ownership of the property, such as newly discovered wills, previously unknown liens, improperly filed land surveys, or environmental issues, or forged titles.
Why do I need Title Insurance?
Title insurance is common throughout most of the industrialized world, although it is more common in the United States than in other countries. In most countries, purchasers are required to register their properties with local government, which acts as the final arbiter of disputes that arise from disputes on ownership and liens.
In America, the purchase is simply registered, without determining if the transfer was valid. It is the purchaser of a property who must ensure that it free of encumbrances. Not only that, a ruling made in the 1800’s determined that the lawyer can not be held responsible if they fail to discover a lean. This means that it burden falls squarely on the purchases, and subsequently on the title insurance company employees to uncover any irregularities in the title.
How much does title insurance cost?
As a general rule title insurance is paid in a single, upfront payment at the time of purchase and varies greatly depending on the price of the home and its location. A $250,000, might carry a premium of $1,000, but this can easily range from a few hundred dollars to more than $2,500.
The premiums and service fees that to go into taking out the policy cover the cost of the title search and examination, and the curing of any defects that are uncovered in the process.
In most real estate transactions, the buyer’s mortgage lender, attorney, or real estate agent may recommend a title insurer for the buyer’s policy if they choose to purchase it. The costs of insurance are largely set by the region they operate it, so it is rare to find significant differences in premiums from company to company. Just remember that as a buyer you are not required to purchase title insurance, and if you do, you are not required to use the one recommended by any specific party.
What kinds of title insurance is there?
There are two forms of title insurance: lender (or “loan”) policies, and buyer policies.
- Lender policies are to protect the party that is issuing a mortgage on a property, usually your bank.
- Buyer policies are to protect the buyer’s interest. If you are buying a property, this is to protect you.
Generally, if you are buying a home, you will be required to pay for both policies. There are cases where the buyer negotiates a cost-sharing arrangement with the seller, but it is unusual unless you are in a strong buyer’s market.
What does title insurance cover?
The cost of the title search, a thorough examination of any relevant public records to determine whether there are any problems with the title. In most cases, this will check the history of the property back to the original platting or subdivision. In some cases, it may be simply a matter of scrutinizing the property’s abstract, the document that should contain the complete chain of ownership and historical leans. In many cases, the abstract can be incomplete, requiring a more thorough examination of local tax records, previous owners’ wills, and applicable court judgments.
- Curing or Resolving Problems
If there is an issue that arises, such as tax, construction, or creditor liens, the premium will cure (resolve) these issues before the sale is completed. Is some cases, there may be issues that can not be resolved. In these cases, the mortgage company can refuse to issue a mortgage, forcing the buyer to walk away.
- Future Legal Costs and Loss Compensation
Once the sale is completed, the insurance policy protects the buys from the costs of any future disputes. In our previous example where there was a construction lien against the property that the insurance company failed to uncover, the buyer would be free of any responsibility for costs associated with resolving the dispute.
Unless otherwise specified, the amount of coverage is usually equal to the price of the property at the time of purchase.
Is title insurance a good idea?
Closing a home is a complex enough process on its own. It may be tempting to see title insurance as an optional cost. But, considering the risks associated with home ownership, and the myriad of things that can affect your most valuable investment, there are almost no situations when it is not worth purchasing.
Featured image credit: UNSPLASH
Sep 25, 2015
Sep 25, 2015
