Title insurance is a necessary evil for property owners and mortgage lenders. Similar to fire and auto insurance, virtually every policyholder hopes he/she will never need to file a title claim. But title insurance seems expensive, whether the property seller or the homeowner pays the premium.
To illustrate, when is the last time you heard of anyone receiving payment on a title insurance policy?
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I’ve been buying and selling real estate for 38 years, and I know many real estate investors, and hear from thousands of readers. But I have yet to hear of a title insurance policyholder who received payment for his/her defective title or insured title risk.
Depending on whose statistics you believe, title insurance companies pay just 5 percent to 10 percent of collected policy premiums for their title claims. Isn’t that shocking?
But it shouldn’t be. Title insurance companies spend most of their earned premiums to research titles to be certain they don’t insure defective or risky titles. If their research reveals a questionable title risk, the title insurer will either refuse to insure the property or issue a title policy with an “exception” for the possible title claim.
For example, years ago I bought a rental house with an odd-shaped, fenced backyard. It had a narrow strip about 20 feet long and perhaps 10 feet wide that was planted as a flower garden. Until I read the title report, I didn’t know that was a separate parcel. The title insurer’s research showed it was still owned by the subdivision developer. The title insurer “excepted” that sliver of land from my title policy for the residence.
Fortunately, the developer was still alive and I knew where his adult daughter lived. When I phoned her to explain the problem, she said, “Have the title company prepare a quit claim deed and I’ll have my dad sign it.” That resolved the possible future title problem for me and future owners of that house.
WHY SMART PROPERTY BUYERS AND LENDERS INSIST ON TITLE INSURANCE. Although title insurers carefully research public records to determine possible title risks, even the world’s greatest title searcher cannot find all title risks.
To illustrate, suppose you buy a house and shortly after you move in a woman knocks on the door and says, “What are you doing in my house?” You politely point out you bought the house from a nice man and you have title insurance. That woman might be the ex-wife of the “nice man” who arranged to have her signature forged on the deed by his girlfriend.
Forged signatures are the number one cause of title insurance losses. Although title insurers use many precautions, they cannot avoid all forgery title losses.
There are many additional title risks that are virtually impossible to detect but which are insured by owner’s and lender’s title policies.
For example, suppose you want to construct a swimming pool in your backyard. But the contractor discovers a water, sewer or underground utility line in the middle of the yard. If that properly recorded easement wasn’t disclosed on your title report, the title insurer must pay to relocate the underground utility so you can construct your swimming pool.
The list of possible title risks is almost endless. For a one-time title insurance premium paid at the time of property purchase, or when a mortgage is refinanced, the title insurer protects the owner and the owner’s heirs from unexpected title risks.
TWO TYPES OF TITLE INSURANCE POLICIES. Most property owners don’t know there are two separate types of title insurance policies.
1. THE LENDER’S TITLE POLICY. Virtually every mortgage lender insists on receiving a lender’s title insurance policy to protect their loan secured by real estate. Without a lender’s title policy, the lender won’t make a loan.
But these lender’s title policies offer zero protection to the property owner. Insured lender title protections include forged signatures in the chain of title, recording errors, deed indexing mistakes, unpaid property taxes, other recorded liens, improper foreclosures, title search errors, undisclosed recorded easements, and title claims by heirs and ex-spouses. Property surveys can also be insured.
2. THE OWNER’S TITLE POLICY. Usually purchased at the time of property purchase, the owner’s title policy protects the buyer’s equity as long as that insured or the heirs own the property. As time goes on, as the mortgage balance is gradually paid down and the insured equity grows, the owner’s title policy becomes more valuable.
To illustrate, suppose you buy a $200,000 house or condo with a $180,000 mortgage. The lender will insist on a $180,000 lender’s title policy. For a slight extra title premium, you can insure your $20,000 equity, which will grow in the future as you pay down the mortgage balance.
Suppose when a title loss occurs, your mortgage balance is $90,000. The title insurer will pay the lender $90,000 for their title loss and you will receive $110,000 paid for your equity insured by your owner’s title policy in this example.
HOW TO SAVE ON TITLE INSURANCE PREMIUMS. There are many ways to save on title insurance premiums. But you must ask because most title insurers won’t volunteer if your situation qualifies for a discount.
Title discount rules vary from state to state, but it doesn’t hurt to shop among title insurers because title insurance savings can be substantial.
To illustrate, when I recently refinanced my home mortgage with Wells Fargo, I contacted three title insurers as to the cost of their lender’s title insurance (I didn’t need a new owner’s title policy). Price quotes I received ranged from $1,550 to $2,110 for a simple refinance. Title insurers in your state might not offer such substantial discounts, but it doesn’t hurt to shop.
ASK ABOUT THE TITLE “BINDER RATE.” Home buyers who only plan to keep the home a few years should ask local title insurance companies if they offer a “binder rate.” Not offered in every state, binder rates are discounted title insurance for short-term ownership up to two or three years.
For example, where I live title insurers charge their standard owner title policy rate, plus 10 percent extra, for a binder title policy. That means if the property buyer sells the property within three years, the title insurer will refund the title insurance premium, except for the extra 10 percent paid for the binder policy rate. This discount is not available in all states, but it doesn’t hurt to ask.
FAILURE TO BUY AN OWNER’S TITLE POLICY CAN BE RISKY. Not long ago I received an e-mail from a home buyer in a new subdivision. Her developer paid for the lender’s title insurance policy. At the closing, she decided to save the cost of an owner’s title policy, figuring the title insurer had already checked the title.
Unknown to that home buyer, the developer had substantial unpaid mechanics’ liens that had not yet been recorded. The result is the home buyer (and her neighbors) are now being threatened with having to pay the developer’s unpaid construction bills. She could have avoided this title risk by acquiring an owner’s title policy when she bought her new home.
TITLE INSURANCE DOESN’T PAY UNTIL THERE IS A LOSS. Like most insurance policies, owner’s and lender’s title insurance pays only when there is an actual loss. This is called an “indemnity policy.” That means the title insurer doesn’t have to pay unless there is an actual title loss or it is seriously threatened.
For example, suppose an ex-spouse of your home seller claims she still owns your house because her signature was forged on the deed. Until she actually files a lawsuit or makes a serious title threat, your title insurance company need not pay under its title policy of indemnity.
CONCLUSION: By shopping among at least three title insurance companies to compare their premiums for similar coverage, home buyers and refinancing homeowners can often save substantial sums. Some title insurers offer discounts, others don’t. But it won’t hurt to ask if your situation qualifies for a title insurance premium discount.
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