Why is Real Estate Title Insurance Necessary?
A question that home buyers often ask is what is real estate title insurance and why do I need it? Below you are going to see a detailed description of what title insurance is and why it makes so much sense to have it. The lender in fact is going to be asking whether or not the buyer would like to purchase their own Real Estate title insurance policy. In many cases I find that home buyer’s really struggle with this decision because of the hefty expense involved.
Title insurance is certainly not inexpensive especially when you factor in all the other cost associated with buying a home.
While title insurance is a one time expense, if you are a home buyer and it is the first time you are purchasing a home it can be difficult to come up with such a large sum of money. Real Estate title insurance can easily run into thousands of dollars in a home purchase. Unlike some other types of insurance, title insurance does not carry with it additional monthly premiums. This kind of insurance is a one time expense covering the owner until the property is sold.
One of the questions I get asked a lot by my buyer clients is “do you think it’s worth getting title insurance ’?
Let me first explain what title insurance is and how it covers you in the event of a claim. Real Estate title insurance is a type of insurance that covers financial loss from defects in title to real property and from the invalidity of mortgage liens.
A title policy is put in place to protect an owner’s or lender’s financial interest in a property against loss due to title defects, liens or other matters. The insurance will defend against a lawsuit attacking the title as it is insured, or pay back the insured for the monetary loss incurred, up to the amount of insurance provided for in the policy.
In my experience all major lenders require title insurance to protect their interest in the mortgage secured by real estate. This is called a lenders insurance title policy. An owner’s insurance policy is not required but in my professional opinion is worth the expense when you consider where you will be if you ever need the insurance.
Home buyer’s have the opportunity to get a substantial discount when they purchases both a lenders and owner’s policy at the closing table. This is called a simultaneous issuance. In Massachusetts for an enhanced policy, it runs about $4.00 per thousand based on purchase price + $175.00. A simultaneous issuance is a one time premium paid at closing and lasts the entire time of the property ownership. Like any other type of insurance not having title insurance when you really need it can be devastating financially.
What is A Real Estate Title Search?
Prior to a buyer taking title to a property or completing the “closing”, the financial institution through which the buyer is getting the mortgage will have a title search completed on the Real Estate.
The reason for the title search is to find any defects in the title. There could be one or more defects in title including liens, unpaid Real Estate taxes, judgments, unpaid condo fees, or others.
If title defects are found the buyer’s or lender’s attorney will inform the buyer of the defects and then work on getting them removed so that a clean and marketable title is given to the buyer.
Title insurance becomes extremely valuable when a defect is discovered in the future that was not found when the initial title search was done.
A title search starts with the most recent deed searching the grantees name (the person who holds title) back in time until the deed from which the grantee acquired the property is found.
That grantors name is then searched back in time to find when the grantor acquired the title as grantee. The typical title examination goes back fifty years but title insurance would cover beyond the fifty year time frame.
Anyone who has had a title insurance claim without having the necessary insurance can tell you it is not a pleasant experience!
Common Reasons For Title Insurance Claims
Example of some of the more common reasons for claims against a Real Estate title insurance policy are as follows:
Impersonating fraudulently the true owner of the property
Forgery of the deed, releases, or wills
Real Estate fraud
Undisclosed or missing heirs to the property
Any Instruments executed under invalid or expired power of attorney
Mistakes when legal documents were recorded
Deeds by someone not of sound mind
Deeds by a minor
Misinterpretations of wills
Deeds with misrepresentation of marital status
Liens for unpaid estate, income, inheritance, or gift taxes
Some buyer’s who really question the expense of title insurance will give me a follow up question as to why they need title insurance if the lender is going to have a policy for themselves?
The easiest way to explain this is to say that the lenders title policy covers the lender and the owners policy covers the owner. To go a step further though you could ask yourself why couldn’t the attorney who did the title search for the lender be on the hook if he was negligent in doing his or her search? The answer is they could but what if they are no longer in business at that time? What will you do in that situation? In this scenario would have a very large problem to deal with!
It should be pointed out as well than an attorney would only be responsible for negligence not the issues that are bullet pointed above. This is the point of having Real Estate title insurance to begin with!
One other important matter pertaining to Real Estate title insurance:
A federal law called the Real Estate Settlement Procedures Act (RESPA) allows the individual homeowner to choose a title insurance company when buying or refinancing residential property. Most of the time, homeowners do not make title insurance decisions for themselves.
Title insurance matters are typically handled by the lender’s or attorney’s; however, a homeowner does retain the right. RESPA makes it unlawful for any lender, attorney, or Real Estate agent to mandate that a certain title insurance company be hired. It is a violation of federal law and any person or business doing so can be heavily fined or lose their license.
Under Section 9 of RESPA it denies a seller from mandating that a home buyer to use a specific title insurance company, as a condition of the sale. Buyers may sue a seller who violates this law for an amount equal to three times the cost of all charges related to the title insurance policy.
Some of the most common title insurance companies are Fidelity National Financial, First American, Land America, Stewart and Old Republic.
In my opinion having an owners insurance title policy is something ever buyer should have unless you just can’t afford it. Although it will be a little more costly you can purchase a title policy in the future should you not have the funds at the closing.
Other Real Estate Title Insurance Resources:
If you still have questions about title insurance these are great references that should be able to help you with any unanswered questions. A qualified real estate attorney should also be able to help as well.