Wonder why you need to buy title insurance? Your home may be new for you, but every property has a history – even new construction. A thorough title search can help uncover any title defects tied to your property. And, subject to the terms of the policy, your title insurance protects you from title problems that may turn up after closing. Some of these common title issues are:
- 1 1. Errors in public records
- 2 2. Unknown liens
- 3 3. Illegal deeds
- 4 4. Missing heirs
- 5 5. Forgeries
- 6 6. Undiscovered encumbrances
- 7 7. Unknown easements
- 8 8. Boundary/survey disputes
- 9 9. Undiscovered will
- 10 10. False impersonation of previous owner
- 11 Play it Safe
- 12 What kinds of title insurance are available?
- 13 How much does it cost to buy title insurance?
- 14 How can you save on title insurance?
1. Errors in public records
Mistakes happen, but when they affect your home ownership rights, those mistakes are devastating. Clerical or filing errors can affect the deed and cause undo financial strain in order to resolve them. If you buy title insurance, you have an attorney to defend against those mistakes.
2. Unknown liens
Prior owners of your property may not have been meticulous bookkeepers — or bill payers. And even though the former debt is not your own, banks or other financing companies can place liens on your property for unpaid debts even after you have closed on the sale. This is particularly relevant when you purchase a distressed property.
3. Illegal deeds
While the chain of title on your property may appear perfectly sound, it’s possible that a prior deed was made by a minor, a person of unsound mind, or one who is reported single but in actuality married. These instances may affect the enforceability of prior deeds, affecting prior (and possibly present) ownership.
4. Missing heirs
When a person dies, the ownership of his home may fall to his heirs, or those named within his will. However, those heirs are sometimes missing or unknown at the time of death. Other times, family members may contest the will for their own property rights. These scenarios — which can happen long after you have purchased the property — could impact your rights to the property. This is a perfect example of why you should buy title insurance – to defend against a completely unexpected issue.
Unfortunately, we don’t live in a completely honest world. Sometimes forged or fabricated documents that affect property ownership are filed within public records, obscuring the rightful ownership of the property. Once these forgeries come to light, you have to defend your rights to your home may be in jeopardy.
6. Undiscovered encumbrances
When it comes to owning a home, three can be a crowd. At the time of purchase, you may not know that a third party holds a claim to all or part of your property — due to a former mortgage or lien, or non-financial claims, like restrictions or covenants limiting the use of your property.
7. Unknown easements
You may own your new home and its surrounding land, but an unknown easement may prohibit you from using it as you’d like, or could allow government agencies, businesses, or other parties to access all or portions of your property. While usually non-financial issues, easements can still affect your right to enjoy your property.
8. Boundary/survey disputes
You may have seen several surveys of your property prior to purchasing, however, other surveys may exist that show differing boundaries. Therefore, a neighbor or other party may be able to claim ownership to a portion of your property. When you buy title insurance, you have someone to defend your rights to your property.
9. Undiscovered will
When a property owner dies with no apparent will or heir, the state may sell his or her assets, including the home. When you purchase such a home, you assume your rights as owner. However, even years later, the deceased owner’s will may come to light and your rights to the property may be seriously jeopardized.
10. False impersonation of previous owner
Common and similar names can make it possible to falsely “impersonate” a property owner. If you purchase a home that was once sold by a false owner, you can risk losing your legal claim to the property.
Play it Safe
These and other issues are typically covered by an owner’s policy of title insurance. When you buy a home, make sure you also buy title insurance to protect that investment. In the grand scheme of things, purchasing an owner’s title insurance policy is a matter of a few to several hundred dollars more paid at closing, while the risk of forgoing the protection is a loss in the hundreds of thousands – to potentially millions of dollars range.
Without an owner’s title insurance, you may be on the hook for the legal expenses and other costs to settle the dispute. Even worse, if you’re unsuccessful at defending title, you could lose your home and all cash invested in the home. An owner’s title insurance policy means your biggest asset has the backing of a multi-billion dollar insurance underwriter and its legal department – should anyone make a title claim, you will be covered and compensated for any losses at no additional cost.
What kinds of title insurance are available?
If you’re taking out a loan to purchase your home, the mortgage lender will require you to purchase what’s called a lender’s title insurance policy, also known as a loan title insurance policy, because it protects the lender for the full amount of the home loan.
A second kind of title insurance policy, known as the owner’s title insurance policy, is optional. Owner’s title insurance protects the home buyer for the full amount of the property’s value. Most real estate professionals advise in favor of purchasing owner’s title insurance protection. Once you have decided to buy title insurance to protect your owner interest, you still have two choices of owner’s title insurance policies. Fortunately, you can wait all the way up until the day of closing to make your final decision between the standard policy and the enhanced policy.
The Standard policy is sufficient for the majority of cases. It covers issues that should have been identified and resolved prior to closing. For an additional 20% an Enhanced policy is also available. It includes the same coverage as the Standard policy as well as a number of post-closing issues and will cover increases in the value of your home, up to certain limits.
An Enhanced owner’s title insurance policy is not always necessary, so talk to your title attorney or closing agent to help you decide the appropriate level of coverage for your real estate purchase
How much does it cost to buy title insurance?
In the DC metro area traditionally it is the home buyer who pays for title insurance and title services.
Because the person who pays for the policy selects the title insurance company, it is the home buyer’s right to shop for and choose the title company and closing agent that will process closing.
Title insurance underwriters are required by law to file their rates with the states where they insure title. Therefore, title companies who are agents of the same underwriter will charge the same title insurance premium. (Title insurance premiums are a different charge from title service fees, which we’ll cover in just a moment.)
There are several title insurance underwriters all over the country that insure title, and they don’t all file the same rates. Sometimes title companies become agents of multiple underwriters, using one title insurance underwriter for one jurisdiction while using a second underwriter for policies in another, etc.
However, state insurance commissioners require title insurance underwriters to file their rates every year, and then title companies are bound by the same rates because the title company acts as an agent of the underwriter.
How can you save on title insurance?
The first thing to ask your title company about is a “reissue rate” discount. This discount is dependent upon the title insurance underwriter as well as the property’s location, but it can lower the cost of your policy premium by up to 40%. Ask your buyer agent to ask the listing agent for a copy of the seller’s title insurance. When you provide that to the title company, they will be probably be able provide you with a reissue rate!
Secondly, when purchasing the lender’s and owner’s title insurance policies together, you should receive a “simultaneous issue” rate. Many homebuyers don’t realize they’re receiving this special rate and are surprised to see how expensive a lender’s title insurance policy becomes when they opt out of purchasing the owner’s policy.
This is not because the agent or underwriter is trying to push the homebuyer toward buying both policies. It’s because the agent still has to do the same legwork to issue a lender’s title insurance policy.
This is another reason to shop several title companies before making a final selection.