What is Title Insurance?
If you’re like most house hunters, you’ve spent plenty of time learning about real estate and mortgages. However, there is a third leg of the transaction that is just as important as the others. Title Insurance protects both real estate owners and lenders against loss or damage occurring from liens, encumbrances, or defects in the title or actual ownership of a property. Unlike traditional insurance, which protects against future events, title insurance protects against claims for past occurrences. The most common claims you are protected from include property ownership by another person, fraud or forgery of the title documents, unidentified easements, outstanding lawsuits, and liens against the property.
Do you need Title Insurance?
When you purchase a home, you expect to enjoy certain benefits from ownership. For example, you should be able to occupy and use the property as you wish, to be free from debts or obligations not created or agreed to by you, and to be able to freely sell or use your property as security for a loan. Title insurance is designed to protect these rights.
So what happens if you have a problem after you have purchased the home?
As soon as there is a hint of a claim adverse to your title, you should contact your title insurer or the agent who issued your policy. Title insurance includes coverage for legal expenses, which may be necessary to investigate, litigate or settle an adverse claim. There are also different levels of title insurance, which we’ll discuss below.
How much does title insurance cost?
The cost varies, primarily depending on the value of your property. The important thing to remember is that you only pay once (at your closing), then the coverage continues in effect for so long as you own the property. If you should die, the coverage automatically continues for the benefit of your heirs. If you sell your property, giving warranties of title to your buyer, your coverage continues. Likewise, if a buyer gives you a mortgage to finance their purchase, your coverage continues to protect your interest in the property.
Why is there a lender’s policy and an owner’s policy?
There are two types of title insurance: owner's title insurance, called an Owner’s Policy, and lender’s title insurance, called a Loan Policy. Most lenders require a Loan Policy when they issue you a loan. The Loan Policy is usually based on the dollar amount of your loan. It only protects the lender's interests in the property should a problem with the title arise. It does not protect the buyer. The policy amount decreases as you pay down your loan and eventually disappears as the loan is paid off.
An Owner's Policy is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts for as long as you have an interest in the property. Only an Owner's Policy protects the buyer should a covered title problem arise.
What types of claims or risks are covered by title insurance?
There are typically two types of coverage – standard and extended coverage. Below is a list of risk that most standard coverage title insurance policies cover:
Forgery and impersonation;
Lack of competency, capacity or legal authority of a party;
Deed not joined in by a necessary party (co-owner, heir, spouse, corporate officer, or business partner);
Undisclosed (but recorded) prior mortgage or lien;
Undisclosed (but recorded) easement or use restriction;
Erroneous or inadequate legal descriptions;
Lack of a right of access; and
Deed not properly recorded.
An extended coverage policy may be requested to protect against such additional defects as:
Off-record matters, such as claims for adverse possession or prescriptive easement;
Deed to land with buildings encroaching on land of another;
Silent (off-record) liens (such as mechanics' or estate tax liens); and
Pre-existing violations of subdivision laws, zoning ordinances or CC&R's.
Subject to availability in your locale, First American's EAGLE Policy covers all of the risks listed above, plus:
Forced removal of improvements due to lack of building permit (subject to deductible);
Post-policy construction of improvements by a neighbor onto insured land; and
Location and dimensions of insured land (survey not required).
What is typically covered by Extended Coverage title insurance?
When purchasing title insurance, be sure to ask your provider what types of policies are available to you. Some of the more common policy enhancements included with Extended Coverage includes, but is not limited to, the following:
Cannot use the land for Single-Family Residence because the use violates a zoning restriction;
Unrecorded lien by a homeowner’s association;
Building permit violations;
Lack of vehicular and/or pedestrian access;
Post-policy adverse possession;
Added coverage leads to additional marketability