When a buyer puts in an offer to purchase a house, the buyer wants to ensure that the property is free and clear of title defects. However, even the most diligent search of public records could fail to disclose several title issues. A simple mis-indexing of a seller’s name in the public records could lead to a loan on the property going undiscovered.
Title insurance is insurance against loss due to an unknown defect in title or an interest in real estate. Unlike other types of insurance, title insurance protects against past problems. Also, unlike other types of insurance, a buyer pays for an owner’s title insurance policy as a one-time fee at closing, there are no ongoing premiums.
Without the protection of title insurance, a homeowner can find themselves in serious jeopardy of losing their investment. Title insurance indemnifies the homeowner against loss in the event of a defect in title.
Lender’s title insurance vs. Owner’s title insurance
- Loan Policy – A policy that is required by the lender which protects the lender against title defects that could affect the lien of the lender’s mortgage.
- Owner’s Policy – A separate policy which protects the buyer against title defects that could affect the buyer’s ownership rights.
- A buyer may choose between a standard owner’s policy and an enhanced owner’s policy. More information regarding the differences between the coverages of these policies is outlined below.
How long does it last?
- Loan Policy – Effective for the life of the loan.
- NOTE: If a homeowner refinances a home, the lender will require the homeowner to purchase a new loan policy, as lender’s title insurance only protects the lending institution for the life of the loan.
- Owner’s Policy – Effective for as long as the buyer or the buyer’s heirs retain an interest in the property or remain liable for any warranties on the title.
- NOTE: Unlike other types of insurance, the purchase of an owner’s title insurance policy is a one-time event. There are no future premiums as long as the buyer or the buyer’s heirs hold an interest in the property.
What does it cost?
- The price can vary depending on property value and location, along with state regulations.
- Run a quote for title insurance here.
Most common title claims:
- Liens – Typically relate to the priority of a mortgage lien in relation to other such liens on the property and other types of liens attached to the property such and tax liens (state or federal) and judgment liens.
- Basic risks – Includes fraud, forgery, undisclosed heirs, marital rights, recorded notices of zoning violations or building permit violations, and improper legal descriptions of the property.
- Encumbrances – Includes missing interests, easements, or other recorded rights.
If a buyer’s lender has title insurance, why does the buyer need a separate title insurance policy?
- The lender’s policy only protects the lender, and only covers the amount of the loan, which typically is less than the full property value.
Differences between standard and enhanced policies:
- Standard coverage handles such risks as:
- A third-party claims interest in the title
- Improperly executed documents
- Pre-policy forgery, fraud, or duress
- Defective recording of documents
- Undisclosed restrictive covenants
- Unmarketable title
- Enhanced coverage includes the above, and also provides additional coverage for the following:
- Mechanics’ liens
- Forced removal of a structure because it either encroaches onto another property or an easement, it violates an existing zoning law, or it is a violation of a restriction in Schedule B of the policy
- Land cannot be used for a Single-Family Dwelling (SFD) because use violates a restriction in Schedule B or a zoning ordinance
- Unrecorded easements
- Violations of building setbacks
- Post-policy issues such as:
- Living trust coverage for trustee
- Living trust coverage for the beneficiary
- Automatic increase in value up to 150%
- Adverse possession
- Clouds on title
- Prescriptive easements
The above is not an exhaustive list. For a more detailed outline of the differences in coverage between a standard owner’s policy and an enhanced owner’s policy, please click here.