Title Insurance: This is Why You Need an Owner’s Title Policy

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In the race to get to closing, most buyers fail to consider the importance of title insurance.  Title insurance protects the owner or lender against loss of the property or financial damage they may incur due to liens, encumbrances or defects in the title to the property.  A seller can only sell you the interest he has in the title. If the seller did not have free and clear interest in the title, he can only sell you the interest he has.  How do you know if a long lost heir can claim an interest in the property you are purchasing?

Lender’s Policy & Owner’s Policy

The most important item to understand is there are two types of title policies: lender’s policy and owner’s policy.  A lender’s policy will only protect the lender while the owner’s policy protects the owner’s interest.  While the lender will require you to obtain a lenders policy, the owner’s policy is optional.  I strongly suggest you purchase both policies.  Purchasing both policies from the same company is usually less expensive as the title research applies to both policies.  Compared to the potential financial loss the cost of title insurance is rather small.  A buyer purchasing real estate for cash should protect his interest with an owner’s policy.

A simple example will illustrate why both policies are needed.  Say a relative from a previous owner proves a valid claim of ownership. Perhaps, documents were mis-filed or a will was out of date and left an interest in the property to another party.  The lenders policy will reimburse the lender the amount you owe under the mortgage.  However, without an owner’s policy, you could lose the home, lose the amount of your down payment, principal payments and other costs.  The owner’s policy will cover your financial losses even if a successful claim for ownership is made and you must move out of the home.  It also covers the legal cost to defend your interest.  While this example is extreme, mistakes do happen.  It is important to have coverage in place to protect yourself in even this rare event.  

You may be tempted to save the cost of an owner’s title policy when purchasing a new home since you will be the first owner of the home.  However, keep in mind the land may have changed owners many times.  Also, suppliers and subcontractors could place liens on the property for payment of products and services. 

How is title insurance different than other insurance?

The first major difference is you only pay the premium for title insurance one time at closing.  The policy will continue to provide protection for as long as you or your heirs own the home or until you refinance.

The second major difference is most insurance protects you from unknown future events, like a car accident or death.  Title insurance protects you from any defect in the chain of title based on past events. 

For this reason, an examination of the chain of title will be conducted going back many years.  Any anomaly found will typically have to be cured before a policy is issued.  So, if the current owner did not pay taxes and has an outstanding tax lien, this would need to be paid by the seller and released.  Similarly, any mechanic liens for work done to the property. 

Who pays for title insurance?

Typically the buyers pays for title insurance for the lender and the owner’s policy.  Every deal is different and open to negotiation.  The cost for title insurance is about $500 to $1,000 in the Outer Banks market (about $3.50 per $1000 of purchase price for title insurance).  Rates and policies are standardized in NC, but like other insurance, riders and additional coverage can also be included or added.

Title search & insurer

Your attorney will assist you in obtaining title insurance.  Under RESPA, you have the right to select the insurance company.  Since your policy could be in effect for decades before any potential claim, it is important to check the financial stability and A.M. Best rating of the insurance company selected for your policy.  You are not required to select an insurance company recommended by the seller, real estate agent, lender or attorney.  However, the lender’s interest is aligned with your long term interests and should be considered.

The title search involves going through the public records or extracts regarding the property.  This includes past deeds, wills, trusts, divorce decrees, bankruptcy filings, court judgements and tax records.  Known easements for power lines or the like are usually excluded.  Any clouds or defects discovered after the preliminary search are the responsibility of the seller to clear.  As many as 1/3 of all title searches reveal a title problem that requires fixing before the transaction can close.

Title problems

Let’s face it people make mistakes.  A document can get filed in the wrong location.  A mistake is made with a name or the legal description of a property.  The list goes on; missing heirs who come forward after your closing, forgeries discovered after the fact, previous liens.  Don’t let a prior small mistake make a huge nightmare out of your dream of home ownership.  A lender requires title insurance for a reason.  You have less resources than a lender to cover a loss affecting your home when title insurance can protect your interest as long as you own the home.  Over the years of ownership, the premium or fee is a small price to pay for peace of mind.  Title insurance coverage also includes litigation cost to defend your property interest.

In the race to get to closing and to preserve your pocketbook, don’t overlook your long term interest by foregoing owner’s title insurance policy.  Like all insurance, one hopes they never need to use it, but are forever grateful they have it when needed.

IMO additional risks from the sheer number of foreclosures after the most recent recession and lack of scrutiny over the details to perfect the foreclosure could impact future buyers that may not be detected or challenged during the title search or perhaps years later.  Home Equity Lines of Credit (HELOC) can also cause nightmares for sellers as these lines of credit often revolved, were not recorded by banks and the number of banks merging and changing ownership has created a document nightmare.  Now, more than ever, buyers need the protection of an owner’s title policy to protect their long term interest.

From seasoned veteran to first time home buyer, Eillu is here to help you navigate the home buying process.  With over two decades of experience in the Outer Banks market, we have experience with the issues coastal properties may face; we can help you with any questions and guide you every step of the way for a smooth buying experience.  Our exclusive buyers rebate will save you money without sacrificing service.  Schedule an appointment with an Eillu Agent today.

 

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