Whenever you take a new mortgage, you’re greeted with an assortment of closing costs and prepaid expenses that seem to defy imagination. There are fees for services you’ve never imagined existed. And nestled amid the list are several types of insurance coverage, one of which, title insurance, is perhaps the most mysterious.
Why do you even need it?
What Title Insurance Does
Any time you purchase real estate or pledge it as collateral for a loan, a legal recording process is required. This affects the title to the property, which refers to the legal ownership of the property.
That ownership can be compromised by the existence of certain liens, both recorded and unrecorded, against the title. And since liens follow an order of succession, where a lender comes in that sequence will determine the priority of their lien against the property.
For this reason, lenders want to be certain that the owner has clear title to the property. That means that there are no such liens, beyond an existing first mortgage, and perhaps secondary financing.
A title search is conducted to determine the existence of such liens. The search will attempt to find out if there are any debts or obligations connected to the property that is not agreed to by the owner or even known to you or the property seller. Clear title can be delivered if no such liens exist.
Title insurance provides coverage because the possibility exists that such liens did not turn up during the title search. Having title insurance can enable you to sell a property or borrow against it without concern for the existence of such liens. In addition to insuring against the liens themselves, title insurance also covers legal expenses connected with litigating those claims.
Specific Claims Title Insurance Covers
Standard title insurance policies insure against a wide variety of potential claims, including:
- Undisclosed but recorded prior mortgages or liens
- Undisclosed but recorded easements or use restrictions
- Liens for contractors who worked on the home but were never paid (mechanic’s liens)
- Liens for unpaid property taxes
- Improperly recorded deed
- Disputes between prior owners over wills
- An erroneous or inadequate legal description
- Fraudulent claims against the property or forged signatures
- Lack of competency, capacity or legal authority of a prior party
- Lack of a right of access
- Deed is not joined in by a necessary party
- Clerical problems in courthouse documents
You can also get extended coverage for additional protection against such claims as:
- Survey errors
- Pre-existing violations of subdivision laws, zoning ordinances or covenants, conditions and restrictions (generally in neighborhoods that have homeowner’s associations
- Deed to land with buildings encroaching on land of another
- Other claims
Exclusions. Virtually all types of insurance coverage have certain exclusions, and title insurance is no exception. One major area is building code violations. If you’ve created any since owning the property, they will be excluded under the terms of your policy.
The Cost of Title Insurance and Who Pays for It
The cost of a title insurance policy varies by state and is typically based on the value of the home that the policy is being taken on. For example, the title insurance may cost 0.5% of the value of the home. In this case, a $250,000 property will require a title policy cost of approximately $1,250. But again, this varies from one state to another.
The cost of a title insurance policy is typically paid for by the property owner in the case of a mortgage refinance, and by the homebuyer with a purchase. However, with a purchase, the cost could be paid by either the property seller or the lender, if closing costs, in general, are being paid by either. It is also possible to have the lender pay the premium on a refinance, though this will require a slightly higher interest rate on the loan.
One advantage to title insurance, unlike other insurance policies, is that you only make a title insurance policy payment once. That happens either when you purchase the home, or you refinance it. The insurance coverage will be good until the property is either sold or refinanced once again.
Lender’s Title Insurance vs. Buyer’s Title Insurance
So far we’ve been discussing title insurance as though it is a single policy. But in fact, there are usually two policies in any single transaction. What we have been referring to so far is lender’s title insurance. That’s a title insurance policy that is required by the lender and is for the lender’s benefit. If there are any liens on the title, the lender’s interest will be protected in the event of foreclosure.
But there is a second title insurance policy, referred to as buyer’s or owner’s title insurance. This is a policy that is typically optional but strongly recommended. It is owned by the homeowner, who is also the beneficiary of the policy. It typically costs no more than $200-$300, and only needs to be paid at the time of purchase or refinance.
The benefit to buyer’s/owner’s title insurance is that in the event there is a lien against the property, you will still be able to either sell the property or refinance it. The policy will cover against any liens, and directly benefit the owner of the property.
Strictly speaking, lenders title insurance would cover against such liens. However, it can take many months, or even longer than a year, for such liens to be resolved through a lender’s policy. But if you have your policy, the situation is handled immediately, and your sale or refinance of the property will not be delayed.
Even though buyer’s/owner’s title insurance is typically not required, it’s still excellent coverage to have, and highly recommended.