Just when first-time buyers have stretched their budgets too much for the down payment on the best home they can, they confront closing costs. So they pore over the list of closing costs in the Good Faith Estimates (GFE) that they receive from their lender.
If they live in one of the 21 states where buyers customarily pay for their lender’s title insurance policy, title insurance might be the most expensive item on the list. They draw a big red circle around the risks covered by title insurance to make it a priority to reduce or eliminate the $1,000 estimate.
When they review the list with their real estate agent, they find out why a title insurance policy is needed. They learn from the agent that they might reduce the estimate by shopping hard for a title company. But one title policy is not enough. They need another to protect themselves from losing their new home.
First-time buyers learn that there are two different state policies — one to protect lenders and another for owners. But that’s not the only things they’ll be surprised to learn. Here’s what real estate agents and their clients need to know about title insurance.
Problems with a title
Title insurance protects homeowners and their lenders from the risk of losing their property due to problems that occurred in the past. Claims can be filed 50 or 100 years after the policy was issued. According to the American Land Title Association, 25 percent of properties have a title defect that requires clearing and curing before closing.
Here is a list of the most common claims:
Forgeries and other forms of fraud can go undetected for decades. Fraud is the leading title defect, according to the American Land Title Association.
Errors or omissions
Sometimes surveyors make mistakes on a survey. Many prior owners fail to record that a loan has been paid off or does not include rights of way or inholdings.
It’s not unusual for clerks to make made mistakes in copying deeds, especially the days before copying machines. Disasters like floods or fires might destroy historic title information;
Sometimes title histories fail to disclose an heir of a past or current owner that might result in a future claim. Past transactions might have identified missing heirs who had rights to the property, but they couldn’t be found, and they might surface and file a
Liens on the property that have been settled buy not recorded or liens that have not yet been filed at the time of the search can stop a sale. Properties cannot be sold with a pending lien for a debt owed by the current owner. Sellers must resolve all liens before the property can be sold. After closing, sometimes creditors attach a lien on the title for a seller’s debt.
Claims occur more frequently than you might think. According to ALTA, in 2012, the industry paid out about $908 million in claims, about 8.1 percent of the $11.2 billion taken in as premiums that year.
Lender’s title insurance vs. owner’s title insurance
Property titles determine the ownership of a plot of land, including the land on which your house stands. Every mortgage lender requires borrowers to hire a title insurer to conduct a complete search of the history your house’s title to ensure that there are no encumbrances that could threaten their lenders’ rights to the property should you default on your mortgage. Lender’s title insurance remains in effect until the mortgage is paid or the house is sold.
However, the title company that insured your lender would be happy to do the same for you, An owner’s policy covers any losses due to past errors in the property record. Unlike most types of insurance, title insurance protects you for events that have happened in the past, not the future.
Owners’ policies cover the value of your home and remain in force as long as you own the property. The value of a lender’s policy declines as the mortgage is paid off. Owner’s policies s in force as long as the owner who bought it owns the property.
Buying an owner’s policy
The average cost of a title insurance policy is about $ 1,000, but the bill can range from a few hundred dollars $2,000 or more. Several factors determine the cost of a policy. The price of the home is the most important variable because insurers’ exposure rises and falls with changes in the home’s value. Other factors that determine the cost of a policy are your credit, your location, and your lender.
If you decide to buy an owner’s policy, your title company will probably “bundle” the prices of the owner’s and lender’s policies into one bill and provide a significant discount on the cost of the second policy, as much as 50 percent. That’s because there would be no need to conduct another search.
In every state, buyers pay for the lender’s policy, but in eleven states, sellers are billed for owner’s policy at closing. In eight states, the cost of an owner’s policy is negotiable, and in the remaining 21 states, it’s customary for buyers to pay for both policies a second search.
These customs regarding who pays for title insurance are not set by law. They are negotiable, and even if you live in a state where buyers pay title costs, you might ask your seller to pay for your policy — after all, it’s his house, and its title should in be in excellent shape and ready to sell.
A great deal is at stake
Losing a claim to your title could cost you your most valuable asset and your family’s home. Simultaneously losing the most significant asset you own and your family’s home could be catastrophic. You might never recover. By paying a few hundred dollars now to protect yourself forever from an error or a fraud years ago will help you sleep better at night.
Even a false claim can be expensive
To defend your title, you might have to pay ten times the cost of an owner’s policy. An owner’s insurance policy will cover legal fees, loss of home equity and moving expenses if you lose.
Anybody can make a mistake
A typo by a clerk, a poorly executed survey, a bitter divorce of a fight among heirs — these is not far-fetched events. Encumbrances like mechanics’ liens, unresolved disputes between neighbors over easements, unmarked inholdings and more — happen in every community.
The risk is real
According to the American Land Title Association, 25 percent of properties have a title defect that requires clearing and curing before closing; In most but not all cases, these are found by a search and fixed before closing.
The real risk is small
I live in a suburban neighborhood that has been developed for more than 100 years, and there are no easements on the property. The house has been sold at least half a dozen times. Since I lived in an area that has been developed for a long time. Why do I need to buy an owner’s policy?
In more established neighborhoods where homes have been bought or sold several times, the risk of a title problem is lower. However, low risk is not any risk. If you don’t have your title searched you could see still the victim of lien against the current owner by an unpaid contractor or an heir to the property years ago who surfaces.
You probably have less likelihood of a problem than someone living in a new area, but without an owner’s policy, you will have no protection. If you have a problem, beginning with legal bills. With an owner’s policy, you won’t have to pay legal representation whether you win or lose.
Leave the risk to the lender
Both lender’s and owner’s policies are based on the results of the same search. Should the search for the lender unearth a problem, it probably can be fixed before closing. If not, the seller can fix the problem after closing.
If a search finds a problem, the title company will inform your lender and, as you noted, try to clear the title before closing. Most, but not all, problems are handled this way. More serious issues such as possible mechanic’s lien against the owner that’s filed after closing or a past fraudulent transaction that could threaten the sale, you will not be protected. Problems that are more serious are also more expensive to solve and might generate a lawsuit. Without an owner’s policy, you could lose your home.
New homes don’t need a title search
How can a new home have a problem with its title? It’s never been owned by anyone. It doesn’t make sense to buy an owner’s policy for a new home
Titles are the deed for the land on which a house is built, not the house itself. The land has been owned for decades, and your lot shares that history with others in the development. If your builder had difficulties paying his contractors, you might have liens from contractors. By having a survey done, you can establish the boundaries of your property.
Buyers who have done their research, even first-timers on a tight budget, might decide to protect their families and their homes with an owner’s policy. If $400 or $500 for an owner’s policy just isn’t available as closing nears, you have two options. Even if you live in a state where buyers usually pay title costs, no law says that a seller couldn’t help out,
You might consider asking the seller to pay for your policy (after all, any problems with the title might have occurred during his tenure) or at least split the costs. Helping you out with an owner’s policy will set a set a friendly tone for your closing.
Finally, you can always by an owner’s title later, after you have settled in and money isn’t so tight. You will have to have a new search done and pay full freight. Problems like fraud or a missing heir might still be hidden and could create a real problem in years to come. It’s not a bad idea to have an owner’s policy stored away should you need it.
Steve Cook is a communications consultant and editor of Real Estate Economy Watch.