A title insurance policy protects the homeowner against fraud, forgery, conflicting wills, missing heirs, and delinquent real estate taxes (among other problems).
Virtually all mortgage companies will require the purchase of a "lender's policy." The lender's policy protects the lender if there's a problem with the title to the home. Title insurance companies offer an owner's policy to protect the homeowner's interest.
The main difference between an owner's policy and a lender's policy is that when the loan is paid off, the lender's policy expires, and if a title problem occurs after the expiration of the lender's policy, then, it becomes your problem no insurance protection.
This is the reason many homeowners purchase an owner's policy along with the lender's policy. The title insurance premium is a flat charge, paid once, usually at the closing or settlement. The title insurance cost varies from state to state. In some states the title insurance cost is set by the state, in other states, the cost will vary from title insurance company to a title company.
Chances are, you will never file a claim with the title insurance company, but, you just might need it. For example:
A young couple purchased a home for $200,000 in Pittsburgh, PA. The buyers and sellers exchanged handshakes and hugs at settlement and the keys were passed to the home buyers.
The buyers went to the house and just as they were about to open the door, a woman opened the door and demanded to know what they were doing entering "her" house. After a heated exchange, the buyers learned that the woman was the wife of the guy who had just sold them the house; and that she was on an extended business trip when the house went up for sale.
The husband's "wife" at settlement was his girlfriend posing as the real wife. The home buyers purchased title insurance and fraud is a covered claim. If they did not have title insurance, they would have lost their down payment.
Another common title insurance claim is the missing heir:
A couple purchased their first home with the help of the wife's aunt. The aunt was an employee at a bank and was entitled to a 0.25% discount on the interest rate if she joined her niece and her husband in the mortgage.
Ten years later, the husband divorced his wife and was removed from the mortgage agreement. The ownership of the house belonged to the wife and her aunt. Unfortunately, the aunt passed away.
Guess who became the owner of the house?
The wife and all of the aunt's heirs. All the heirs released their ownership interest in the home, except an estranged cousin who had a beef against the wife. A judge had to remove her claim against the property.
Does this stuff happen? It does, because this is my title insurance horror story.
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Frequently Asked Questions About Title Insurance
Can I buy a house without title insurance?
If you're financing the home, the lender will undoubtedly require title insurance because it is the lender who has the most to lose if there is a problem with the title.
For example, will you continue to pay the mortgage if you discover that the seller failed to pay the property taxes for ten years, or fraud was involved with the sale?
If you are purchasing the home with cash, it still makes sense, unless you are purchasing the home from your parent(s) and know absolutely that there are no title issues.
Do I have to pay the lender's title insurance?
In most states, the buyer pays the lender’s policy, because it is your lender that is requires a title policy.
Do I need title insurance for a foreclosure?
You bet. Who knows what cobwebs are hanging off the title? It is a foreclosure. The previous homeowner for one reason or another did not pay the mortgage payment. Did the previous owner to pay the property taxes, water bill, contractors who worked on the house?
Do I need title insurance for my house?
Title insurance is a one-time charge to protect you and the lender against a variety of problems that occur with real estate.
Like any other type of insurance, the chance of a problem is minimal, but, if there is a problem, the consequences could be massive. How would you feel if after paying your mortgage for 30-years, you're told you don't own the home.
Does title insurance cover zoning?
Probably not. However, most attorneys or title insurance agents will examine the property boundary lines for compliance to building lines. Speak to your title agent for the definitive answer to this question in your state.
How much are title insurance fees?
Title insurance fees vary from state to state. The title insurance fees in some states like North Carolina are very reasonable. In New York, open up your wallet. Shop around!
How much does it cost for title insurance?
In some states like New York, Pennsylvania, and New Jersey, the cost of title insurance is regulated (set) by the state. Therefore, the cost is fixed and you cannot obtain a discount.
However, in many states, the cost is either not set or allowed to be negotiated.
What are the benefits of title insurance?
Here are a few reasons to obtain title insurance:
- Deeds and mortgages by foreigners who may lack lawful capacity to hold title
- Deeds and wills by individuals lack legal capacity
- Deeds by persons falsely representing their marital status
- Federal estate and gift tax liens
- Forfeitures of real property due to criminal acts
- Forged deeds, wills, mortgages, releases of mortgages and other instruments
- Inadequate legal descriptions
- Legal capacity of foreign personal representatives and trustees
- Legal documents incorrectly recorded
- Mistakes in the tax records
- Seller impersonation
- State inheritance and gift tax liens
- Transfer in violation of public policy
- Undisclosed heirs
- Unpaid Special tax assessments
- Utility easements
What are title endorsements?
Title endorsements are targeted title insurance coverage, in short, additional insurance protection.
Common title endorsements include Condominium, Planned Unit Development (PUD), adjustable-rate Mortgages and Negative Amortization Loans, Manufactured Housing, Environmental Protection, Restrictions, Encroachments, Minerals and Reverse Mortgages.
Some title insurance policies include the standard title endorsements or the title insurance can be in addition to the base title policy. The cost for the endorsements vary from state to state. In general, the cost range from $50 to $100 per endorsement.
Here are two examples of title endorsements:
- The condominium endorsement provides insurance coverage against violations of covenants, conditions and restrictions and encroachment issues.
- The environmental endorsement provides protection in favor of the owner/lender against an environmental lien filed against the property by a governmental authority. The lender is usually the first lien holder against the property if there is foreclosure action. However, if an environmental lien is placed against the property by a local, state, or federal government or agency and the lien jumps before the lender, the environmental endorsement provides coverage for loss that occurs due to a government lien.
What is a title commitment?
A title commitment, also called a title binder or preliminary title report is the title company's pledge to provide a title insurance policy for the property after closing. The title commitment contains the terms, conditions, and exclusions that will be in the insurance policy after settlement.
The title commitment letter will state the amount of title insurance offered and the description of the property being covered by the title policy. The commitment letter will also list any exceptions to the insurance coverage.
A typical exception is a public utility easement that allows a power company's right to stretch electrical wires across the property.
The title commitment is very important to the mortgage company because it states issues that may keep the lender from moving forward with the loan. For example, the title commitment might state that there is an exception for an easement provided to an oil and gas company. This type of easement might not sit well with the lender.
What is an abstract of title?
The abstract of title is a report based on a title search that shows the property's history of every change of ownership on the property, and any legal claims against the property, such as easements on the property, loans against the property, deeds of trust (mortgage), mortgages, liens, judgments, and property taxes. The abstract of title can be prepared by a title company, attorney, or an individual called an abstracter. All lenders require the title report with an abstract.
Who usually pays for title insurance?
The title insurance payment varies from state to state and sometimes varies from county to county within the state (such as Ohio). In most states, the buyer pays for the title insurance policy, however, the payment can be dictated by the sales contract or a seller paid concession.