Educational Consumer Tips
Protecting An Important Investment
Buying a home, one of the single largest investments a consumer can make, is a complex, financial transaction full of important details that ought to be carefully considered, and clearly understood before signing the contract.
One of those details, often overlooked by home buyers, is the purchase of a title insurance policy. While most mortgage lenders require home buyers to purchase a title policy at closing, few buyers really understand why they need it or what they are buying. In addition, many buyers mistakenly assume that their investment is protected by the title insurance required by their lender. In reality, a separate policy is needed to provide full protection for the new homeowner.
What Is Title Insurance?
A title insurance policy, in effect, provides an assurance that you really own the property you think you own.
When you purchase title insurance, the protection you are buying is based on a title search of public records that traces the chain of ownership of the property involved, and includes a guarantee from the title company that the title is accurate as stated.
This initial search and examination are important in identifying title problems before your real estate purchase is completed. While almost all other forms of insurance protect you against future events, a title policy is designed to protect you against the hazards of the past.
There are two types of title insurance policies:
- Lender's Title Insurance: In most areas of the country, the mortgage lender requires that the home buyer purchase a lender's title insurance policy to protect the lender's security interest in the real estate. Lender's title insurance is issued in the amount of the mortgage loan. The amount of coverage decreases, and finally disappears as the mortgage loan is paid off.
- Owner's Title Insurance: Protects the home buyer's interest and is normally issued in the amount of the purchase price of the property. Coverage means that the insurer will pay all valid claims on the title as insured.
In addition, the title company will pay all legal fees for defending against any attack on the title as insured, as long as the purchaser, or his/her heirs, retain an interest in the property.
Potential Title Problems
When you purchase property, you are really buying the seller's rights and interests in the real estate. These rights and interests, often, are not as clear as they may seem, because there are a variety of factors that can affect the seller's title.
Some of these factors can restrict the home buyer's rights to use the property as he or she wishes. For example, a utility company may have the right to construct a power line across the property; or federal, state or local governments may have a lien on the property for back taxes or other assessments.
Other potential problems include the rights of adjoining landowners to enforce covenants restricting the use of the property, or the ownership by others of mineral or air rights.
Additionally, title problems, such as claims by heirs to an estate, forged deeds, or mistakes in the public records, can pose a challenge to ownership.
Therefore, it is very important that before you buy property, you know what rights the seller can convey, and who else may have an interest in the real estate that could affect your ownership, use and enjoyment of the land and structure.
The Title Search
A title search to determine what limitations there may be on property ownership is a complicated process that can include an examination of records in the office of recorders or registrar of deeds, clerk of courts and other municipal and county officials. These records cover all recorded judgements, street and sewer assessments, special taxes and assessments, and other documents affecting title to the property.
However, even the most thorough search of public records cannot guarantee that no title hazards exist. There are a number of problems that do not always show up in the examination of public records, which can cause serious problems, financial loss, or even loss of the property for the buyer. Some of these problems include the following:
- Mistakes in the public records, including descriptions of property that appear accurate, but are not;
- Pending legal action against the property that could affect ownership;
- Unreleased mortgages;
- Liens against property because the seller has not paid taxes;
- Fraudulent acts, such as forged deeds, mortgage releases and other documents;
- Misinterpretations of wills;
- Claims by children born or adopted after the date of a will;
- Claims by previously undisclosed heirs;
- Deeds by minors, aliens in some states, or persons of unsound mind;
- Administration of estates of persons absent, but not deceased;
- Claims of creditors against real estate sold by heirs;
- An easement that allows construction of a road or utility lines at a later date; and
- Mineral or air rights owned by others.
Why Purchase Owner's Title Insurance?
When you buy real estate, you expect to obtain clear title to the property you purchase. If challenged and you successfully defend your rights of ownership in court, there probably will be legal fees and costs to be paid. If your defense fails, you could lose the property, or at least experience a serious financial loss.
According to title insurance experts, owner's title insurance is necessary, even if your real estate attorney performs a title examination and assumes liability for his work. When an independent attorney performs a title examination, his liability is limited to negligence and does not include responsibility for any hidden title problems. An attorney's liability is also restricted by his ability to pay.
As a result, the cost of defending against a title claim and the expense of a title loss may become the sole responsibility of a real estate purchaser, or mortgage lender. That is why most lenders require home buyers to purchase lender's title insurance, and why home buyers should seriously consider buying a separate owner's title insurance policy at the time of purchase. In some cases, owner's title insurance may be paid for by the seller of real estate.
Remember, even if you buy property for a seller who owned the real estate for a relatively short time, you will need an up-to-date title search, and new owner's title insurance to be protected because the title insurance of a previous owner will not protect a new buyer.
A new owner's title insurance policy is also important because, previously undisclosed title problems could emerge from the distant past, or there may be new problems that have developed, even though the seller owned the property for only a short time. The seller may have been divorced, become bankrupt, or agreed to an easement across the property. A new owner's title policy will protect you against these types of problems.
Cost Of Title Insurance
Title insurance is paid at the time of purchase, and the one-time premium is usually included in the closing costs. There are no annual, renewal premiums, as is the case with casualty insurance.
The purchase of title insurance is often handled by the real estate broker, lender, settlement attorney or other real estate professional, as part of the closing process. In certain locales, the home buyer must specifically request and pay for an owner's title policy.
Title insurance is available in all states, except Iowa, where lenders or buyers may still require the purchase of a policy, but from an out-of-state title company.
Real estate practices often rely on local custom, making it difficult to generalize about such matters as whether the buyer or seller pays for title insurance, how much it will cost, and exactly what is included in the cost of title insurance.
As a general rule, the title insurance industry estimates an average cost of $3.50 per $1,000 for owner's title insurance and $2.50 per $1,000 for the lender's policy. However, these figures should only be used as benchmarks for comparison because the actual costs of both lender's and owner's title policies depend on the local marketplace.
Charges for title insurance vary because associated costs and the work included in the premium price vary from place to place. In some areas, for example, title search and title insurance are separated in the list of closing costs, and the cost of title insurance simply represents the risk premium.
In other parts of the country, the title insurance premium may also include the cost of the title search, examination, and in some cases, even include some additional closing costs.
Because of these differences, some variation from the average costs cited above are to be expected. However, it is still wise to question the price you are quoted, if it varies widely from these averages.
Also note, when lender's and owner's policies are purchased together on the basis of the same title search, the total cost is often lower than when the two types of coverage are purchased separately.
What Is Covered?
Owner's title insurance covers problems of title that may not have shown up in the title search. These include mistakes make in researching the title and errors in public records, as well as claims that surface after the title is issued.
In addition, the title company will pay legal fees incurred, if the policy holder has to defend his/her right to the title against any claim on the title as insured, as long as the purchaser or his/her heirs retain an interest in the property.
Unlike casualty insurance, where an insurance company agrees to assume risks, title insurance emphasizes risk elimination before insuring. The title insurance company will identify problems found in the title search, so they can be resolved when possible.
For its one-time premium, the insurer will usually, specifically exclude from coverage those items that the title search reveals as serious problems. These can include difficulties related to easements, mineral or air rights, or liens on the property. These problems should be resolved before purchase.
Problems not listed as exceptions from coverage in the title policy, or otherwise excluded by its terms, generally are covered under your owner's title insurance.
Title insurance does not cover defects created after you purchase the property. It is a form of insurance that covers title defects that happen prior to purchase, and the consequences of those defects on the present owner and policy holder.
Inflation riders, available in some area, increase the amount of policy liability as property values increase, and are among the additional coverages available from title insurers.
Tips To Remember
- The time to buy owner's title insurance is when you purchase property. Your lender will almost certainly require that you purchase a lender's title insurance policy at closing, and it is much less expensive to purchase the owner's policy at the same time and from the same company.
- You should shop around for the best price and best title insurance policy. While many mortgage lenders may customarily work with a particular title insurance company, your lender should not object if you want to purchase title insurance from another reputable title insurance company.
- When purchasing and owner's title policy, ask the title companies for their rate schedules. Most companies will attempt to beat the competition to win your business.
- Contact your state insurance department, Better Business Bureau, and consumer protection agency to inquire about the number, type and resolution of complaints lodged against any of the title insurance companies you are considering.
- If you are buying a house from a seller who owned the property for only a few years, you may be able to save money on owner's title insurance by purchasing a policy from the same title insurance company that covered the previous owner. Ask the company for its "Reissue Rate." It is often lower because the insurer does not have as much research to do. While an entirely new policy is issued, the company only has to update the research performed on the previous policy before issuing you a new one.
- Be aware of specific exemptions, or exclusions, under which title insurance is issued. These are usually red flags for the prospective home buyer that point out potential title problems--such as liens or easements--that could be problematic. They are technical in nature, and should be resolved prior to purchase. Consider discussing them with a real estate professional.
- Obtain a commitment for the issuance of a title insurance policy before closing. This will show you those matters that may appear in the policy as exceptions, and will enable you to discuss their effect and consequences with your attorney, or other real estate professional.
- Ask whether you are obtaining "survey coverage." While this coverage may require a current survey and entail additional expense, you will not be covered for such matters or encroachments, if your policy contains a survey exception.
Questions and Comments
Question Submitted 1/14/2013If there is an exception on the Title Commitment and it is not listed on the short form lenders title policy, is the lender covered? Or since it is listed on the commitment, can the title insurer state that it was disclosed (even though the title insurer left the exception off of the final lender's policy)? For example, an exception for a line of credit is on the Commitment but it is not on the final title policy. If the home were to be foreclosed on because the borrower quit paying on their line of credit, would the title insurer have to cover my company in full because it was not listed as an exception on the title policy?
BBB's Answer:Below is some basic info on Title Commitment. You may want to contact your insurance agency with specific questions.
When you buy a home, in most cases you will be required to obtain title insurance. Title insurance protects your legal ownership of the property you buy. The insurance policy will be subject to certain exclusions and exceptions. Prior to issuing the insurance, the title company will conduct a thorough search of public records to determine the exceptions to coverage, such as any liens or restrictions that affect ownership of the property.
For example, if the seller failed to pay property taxes, the government would have a lien against the property. The property could be seized and sold to pay off the seller’s back taxes. If you were to purchase the property without knowing about the unpaid taxes, you could end up having to pay the back taxes yourself or risk losing the property.
When you purchase title insurance, the insurance company informs you of any outstanding liens so that you can require the seller to satisfy the liens before you close.
Prior to your closing, the title company will issue a commitment for title insurance. This commitment will indicate:
The commitment for title insurance is not the actual policy, but it guarantees that the policy will be issued if conditions specified in the commitment are met. In almost all real estate transactions, separate title policies will be purchased for the lender and the buyer.As the buyer, you would typically purchase the lender’s policy, which covers only the amount of the loan. The buyer’s policy — which insures you, the buyer — is for the full sales price and it is often paid by the seller.
Question Submitted 1/16/2013Who should pay for the title insurance on a commercial policy?
BBB's Answer:I believe this is negotiable.
Question Submitted 1/16/2013If a title company does not properly research property taxes owed, then the seller gets hit with an escape assessment that was not handled in closing, will title insurance cover this mistake? My situation involves a trustee, and the death of the first trustee who set up the trust, then the death of the first successor trustee. I am facing a reassessment going back to the first death. This all should have been researched during closing. Thank You
BBB's Answer:You will have to contact your attorney with this specific question.
Question Submitted 2/7/2013Is there a time limit the title insurance company has to resolve a problem with the title? We bought our house 5 years ago went to sell and found out there was a problem with title. It has been 8 months now and they stil haven't resolved problem and we can't afford that mortgage and our house rent! Do we have any more options??
BBB's Answer:I am not sure if a time limit is stipulated on this or not. I would check with the attorney you are or were working with to sell the house.
Question Submitted 2/9/2013My mother passed away and her home is in active foreclosure. I found a title insurance policy, Does this cover or protect the esatate? I am the executor of the estate. Does it protect the home from auction sale? I am trying to do a loan modification.
BBB's Answer:You would have to refer to the policy and review what it covers. Title Insurance typically provides protection against loss arising from problems connected to the title to your property.
Question Submitted 2/21/2013Does title insurance plus cover structural damage to foundation?
A title insurance policy, in effect, provides an assurance that you really own the property you think you own. When you purchase title insurance, the protection you are buying is based on a title search of public records that traces the chain of ownership of the property involved, and includes a guarantee from the title company that the title is accurate as stated.
Question Submitted 3/6/2013We were the first owners when we bought our house new in 2004.We refinanced in 2009 and are going to refinance again now because of lower rates. We are going through the same bank we refinanced with in 2009. There's never been any outstanding liens, never an issue or question about the title, never missed a payment, never had any kind of legal trouble. We have excellent credit ratings and scores. Our bank is including $601 for title insurance in our Estimate of Costs. Why are they charging us for that again and do we have to pay it? Thank you.
BBB's Answer:I would check with your attorney and have him advise you on this.
Comment Submitted 4/7/2013What is a reasonable time frame after a closing that a title insurance policy is issued (policy written and filled with the title insurance company)? 4 days? 4 months?
Comment Submitted 4/11/2013I REFINANCE MY HOUSE IN 2005 AND THE TITLE COMPANY ISSUED CHECKS TO CREDITORS I OWED MONEY TO. I DIDN'T CHECK MY CREDIT REPORT TILL NOW AND I FIND OUT THAT THE CHECKS THEY ISSUED WHERE NEVER SENT TO MY CREDITORS. NOW I CALLED THEM AND THEY SAID THEY DON'T KEEP TRACK OF OPEN CHECKS. THEY SAID THE MONEY IS IN THERE NON INTEREST BEARING TRUST ACCOUNT. THOSE ACCOUNTS BACK THEN WERE PAID IN FULL NOW THERE A NEGATIVE ON MY CREDIT REPORT OR A CHARGE OFF. WHAT CAN I DO? I WOULD HAVE NEVER KNOWN IF I DIDN'T CHECK MY CLOSING STATEMENT TO SEE WHAT CREDITORS WERE PAID. HOW MANY OTHER CHECKS ARE THE KEEPING FROM OTHER CLIENTS. I TOLD THEM EVERY MONTH YOU HAD TO CARRY THOSE CHECKS ON YOUR BOOKS.
Question Submitted 4/14/2013In 1987 I purchased a lot with pool on same 1 3/4 acres, I purchased title Insurance. Now I want to sell..I am 78..and i find out I only own 1 1/5 acre. Here the deed dept at court house made a mistake..I already hired a lawyer, but he really doesn't tell me a thing. Will my title Insurance that I purchased in 1987 cover all this expense to have things corrected??????
BBB's Answer:Your attorney will need to assist you with this.
Views expressed on this page are those of the individual author and do not necessarily reflect the views of Better Business Bureau.
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