Why I Need Title Insurance
Purchasing an owner’s title insurance policy is a matter of being safe rather than sorry. Different from other insurance policies that protect against possible future events, the owner’s title insurance policy protects you against events that occurred in the past. Errors that could impact or threaten your ownership rights are numerous and could include: recording and survey errors, unknown creditors and fraud. These defects usually present themselves years after the property is purchased and could result in, at the very least, legal fees. In a worst case scenario, it could lead to the loss of your property, the equity you established and your down payment.
In a litigious society, it makes sense to protect the biggest investment you will make in your lifetime.
Closing Costs 101
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Title insurance is a policy that provides protection against future losses that might result from a variety of possible title defects or encumbrances that existed at the time of closing. Before you purchased your home, it may have gone through several ownership changes, and the land on which it stands potentially went through even more changes. There may be a weak link at any point in the chain that could emerge later and cause trouble. For example, someone along the way may have forged a signature in transferring title - or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.
Some common examples of problems covered by title insurance include:
- Improper execution of documents
- Mistakes in recording of legal documents
- Mistakes in the indexing of legal documents
- Mistakes in legal descriptions of property
- Forgeries and fraud
- Undisclosed or missing heirs
- Unpaid taxes and assessments
- Unpaid judgments and liens
- Unreleased mortgages
- Incorrect interpretation of wills
- Mental incompetence of grantors of property
- Impersonation of the true owners of the land by fraudulent persons
- Fraud in securing essential signatures
- Refusal of lender to provide financing based upon condition of title
- Refusal of potential purchaser to accept title based upon condition of title
A title search is the process of verifying the seller’s right to sell or transfer property ownership. The title search provides early warnings of any title-related restrictions or flaws that must be dealt with before the property can be sold or refinanced (such as liens, mortgages, etc.). Prior to closing, the title company examines public records (such as liens, recorded documents, judgments, taxes, street easements, sewer assessments) for any matters that could affect property ownership.
There are some title defects that cannot be uncovered with even the most thorough title search. For example, a search will not uncover that a valid deed was indexed improperly in the land records. Title insurance will protect you from these types of defects.
Although highly recommended, you do not have to purchase title insurance if you pay cash for the home you are buying. The vast majority of banks and other mortgage lenders, however, require that the borrower obtain a Lender's Policy of Title Insurance equal to the loan amount.
A lender's policy protects the lender up to the amount of their outstanding debt on a mortgaged property. The value of the policy decreases as the loan principal is paid down and expires when the mortgage is paid in full.
An owner's policy is purchased in an amount equal to the purchase price and lasts for as long as you and your heirs have an interest in the property. The owner's policy is there to protect the owner's equity in the property.
Often, local custom dictates whether the buyer or seller pays for the premium, but sometimes sellers and buyers negotiate who will pay the premium without regard for local customs and procedures. Be sure to ask your real estate professional what is customary in your area and what your options are.
No. You have the absolute right to choose your own title insurance company. Also, if anyone insists that you use a company they recommend, it is in your best interest to ask them if they are receiving a commission or referral fee from the company, or if they are affiliated with the company they are recommending. Title agent commissions can be as high as 90 percent of the title premium you are being asked to pay.
While the title insurance policy is issued at closing for a one-time premium, based upon the loan amount and/or purchase price, you should start shopping for title insurance as early in the home buying/selling/refinance process as possible. The preparation that leads to the title insurance policy being issued begins in the very early stages of the closing process.
Title insurance companies offer industry-standard title policies adopted by the American Land Title Association (ALTA) or an individual-state's land title association.
As its name suggests, enhanced policies provide the owner additional coverages. Examples of coverage included in an enhanced policy that are not covered by a standard policy, include:
- Mechanic's Lien Coverage for work provided prior to the date of the policy
- Zoning coverage to ensure that your property is zoned for a single-family residence
- Coverage that your property is in a properly created sub-division
- Coverage in the event that you are required to remove an existing structure on the property (other than a fence or boundary wall) due to a previous owner's failure to obtain the necessary permits
- Post-closing forgeries that affect your ownership interest
While settlement/closing practices may vary from state to state, the following representatives are generally present at the closing for a purchase transaction:
- Home buyer
- Home seller
- Seller's real estate agent
- Buyer’s real estate agent
- Attorney(s): The buyer, seller and lender may have attorneys
- Closing agent: The agent conducts the closing and ensures all documents are signed properly
- Mortgagee (the lender)
At the closing, the seller signs documents transferring property ownership to the buyer. The buyer signs documents related to the mortgage agreement and ownership of the property. These documents include:
- The final closing disclosure form
- Mortgage note stating the buyer's promise to repay the loan amount
- Mortgage or deed of trust securing the mortgage note
- Any additional documents required by the lender
Closings costs in a real estate transaction include any fees, commissions, taxes or miscellaneous expenses associated with the transaction. Closing costs are incurred by the buyer and the seller and vary from state to state. In general, these are some of the typical closing fess you might find in a real estate purchase or sale: record fees, notary fees, commissions for listing and selling agents, mortgage payoff balance, bank processing fee, origination fee, appraisal fee, tax servicing fee, flood certification fee and title insurance.
A home buyer will typically pay between about 2 to 5 percent of the purchase price in closing fees. So, if the home you purchased cost $200,000, expect to pay in the range of $4,000 to $10,000 in closing costs.
Choosing the Right Closing Agent
Generally you, as the buyer, will have the right to choose the closing agent for your transaction. A closing agent can be a title company or an attorney.