Title insurance, especially Owner’s title insurance, is extremely important when purchasing a home or a piece of land. Consumers as a whole are unsure about what title insurance is and what it protects against. Here are some answers to the more common questions about title insurance.
What is title insurance and what does it protect me against?
Title insurance protects you and/or your lender should someone challenge the title to your property because of title defects that were unknown when you bought your home. [Learn more…]
What are the different types of title insurance?
There are two: Owners Title Insurance and Lenders Title Insurance (Loan Policy).
Most lenders require a loan policy in order to make a loan. It is based on the loan amount, and protects the lender’s interests in the property should a title problem arise. As you pay down your loan, the liability decreases, and eventually disappears once the loan is paid in full. For this reason, the premium rates are lower than Owners title insurance.
The Owner’s title insurance policy is generally issued for the amount you pay for the property. It is paid for at closing, and lasts as long as you or your heirs have an interest in the property. The policy also pays for any legal fees involved in defending a claim to your title.
You did a title search, so why do I need title insurance?
You should purchase Owner’s title insurance to protect you against the defects that a title search can’t reveal. [Learn more…]
The house is new, why do I need title insurance?
There are two things to consider in answering this question:
First, the house is new, but the land has been there forever. So, the same issues can arise as to ownership as mention before.
Second, being a new house, many subcontractors and suppliers have provided labor and materials during construction. If they were not all paid, they could file a mechanic’s line on your property.
An Owner’s title insurance policy will protect you against these potential problems and pay for any legal fees involved in defending a claim.
I am obtaining a 100% financing, the Lender is getting a title insurance policy, so why do I need Owner’s title insurance?
Defending title claims is a very expensive undertaking. Aside from the potential for losing a large sum of money, you may also face the loss of your home.
Take this example: You purchase a home for $250,000.00, and you get a loan for the entire $250,000.00. The lender has a mortgagee title insurance policy, but you decline the Owner’s title insurance.
If there is a claim against the title to your property, the title insurance company would defend the Lenders first lien on your property, but you’re on your own. You would have to take on the expense of your legal defense. If you lose, not only do you have large legal bills, you could lose your home.
And, to rub salt into that wound, after the title company pays the lender for its loss, the title company is entitled to an assignment of your debt to the Lender—so, the balance of your loan is now owed by you to the title insurance company.
If I bought a home and an Owner’s title insurance policy, what happens if someone challenges my title ten years down the road?
Let’s hope it never happens, but if it does, you first need to notify your title insurance company as stated in the policy. They will undertake the defense of the title. Should the claim reach the courts, the title company will hire, and pay for, attorneys to defend your title-whether you just purchased your home, or purchased it decades ago.
I am refinancing my loan. Why is my Lender requiring a new Lender’s title insurance policy?
Your lender wants to be assured that its loan will be a first lien on your property.
Since the time you purchased your home, there are problems that my have arisen: mechanic’s liens, a home equity loan, judgments, unpaid taxes are just a few.
If you can provide a copy of your prior title insurance policy, you can generally get a lower “reissue” rate for you new policy.
If you are still not convinced about the importance of Owner’s title insurance, the article below is by our friend Dixie Benton at Pioneer Title. She sums it up nicely.
What Every REALTOR® Should Know About Title Insurance
Make sure your clients are protected
By Dixie Benton
The process of buying a home has gotten pretty complicated, with mounds of paperwork and documents to sign. Fees show up at closing that can sometimes be a big surprise to the buyer, who often has no idea what they’re for.
Title insurance is one of those charges little understood by home buyers, who often see it as just another fee they have to pay to buy a home. As an important advisor to your clients, you can help them understand the value that title insurance provides, and the dangers that can be incurred without it.
Title insurance protects against problems affecting the title to a home, which is probably your client’s most valuable asset. There are two types of title insurance policies. A Loan Policy is almost always required by the lender and insures the title for the amount of the mortgage loan. An Owner’s Policy, on the other hand, insures the homeowner’s investment, such as their down payment and equity. Both are needed.
Having a problem with a title can seem rather remote because, historically, the title insurance industry has not had to pay a large amount in claims. This is due to the exhaustive due diligence work that is performed by the title company prior to closing. The American Land Title Association estimates that one out of every four title searches reveals a problem with the title.
Because of the corrective work that title professionals perform, most buyers are unaware of these problems and the closing goes smoothly. Few problems with title ever end up resulting in a claim. However, when it happens, not having the proper protection can be devastating to a homeowner.
Some title problems are easy to detect, such as prior tax liens or a lien from an unpaid subcontractor. But other problems can be more difficult to detect, such as forged signatures in the chain of title, recording errors, undisclosed easements or title claims by missing heirs or ex-spouses. For this reason, having both a Loan Policy and Owner’s Policy ensures that your clients are fully protected.
For more information on the title insurance industry, visit the American Land Title Association web site.