Everything You Need to Know About Title Insurance Before You Buy a House
What Is Title?
Title is the proof that a person or company has the right to own and use a property. Title most often takes the form of a Deed but the right to a property can take many other forms too. It is possible that someone other than the current owner has a legal right to a property. A claim to your title can result in lost money and even the loss of your home.
What Is Title Insurance?
Title Insurance is an insurance policy that protects you and your lender against defects in Title.
Why Is it Needed?
It is not uncommon for individuals and entities other than the record owner of the property to have a right, interest or claim to that property. For instance, most people borrow money in the form of a mortgage in order to purchase their home. That mortgage gives the lender a right to the property. If the borrower defaults on their loan, the lender many exercise their right to the property, foreclose, and attempt to regain some of their lost money by selling that property.
What would you do if that unpaid mortgage had been taken out by the previous owners? Title Insurance protects against claims such as that.
Other examples of risks against which standard title insurance may protect you include unpaid judgments, taxes and municipal services, undisclosed or missing heirs, use restrictions, forged documents, signatures of minors or mentally incompetent persons, fraud, clerical errors, wills not probated and more.
What is a Title Search?
A title search is a review of public records at the county courthouse to determine the status of a property including ownership rights, liens, judgments, and use restrictions.
What kinds of problems can a title search reveal?
Some examples are unpaid taxes, unsatisfied mortgages, judgments against the buyer and seller, bankruptcies and restrictions on the use of the land.
Are there any problems that a title search cannot reveal?
Fraud, mental incompetence, clerical errors, environmental hazards and defects in the buildings on the property are examples of the hidden history that a title search may not reveal. Title insurance is needed to protect against some such defects coming to light after you have purchased your home. Home Inspections will reveal defects such as construction problems or environmental hazards.
What are the title company’s responsibilities in addition to conducting the title search?
In addition to correcting any minor title problems (i.e. collecting for due taxes and mortgages), the title company will provide a title commitment and insurance coverage. If more major defects are found, we provide the seller with help and guidance in clearing those problems. We will work with the lender providing them necessary information and ensuring their detailed closing instructions are followed to the letter. We coordinate with the real estate agents, mortgage broker, lender, buyers and sellers to make sure all tasks are complete and ready for settlement. Settlement is conducted by our closer. The closer is responsible for making sure all paperwork is completed correctly, notarized and delivered to appropriate parties and locations. Our escrow accounts serve as a neutral exchange for all funds in the transaction, which makes us responsible for safeguarding their security and ensuring they a disbursed to the proper individuals and companies at the correct time. After settlement, we must return the loan documents to the lender, record the deed and mortgage at the county courthouse, prepare the title insurance policies and return the policies with the recorded documents to the new owners and lender.
The Cost of Title Insurance
Do I have to make monthly payments?
No. Title Insurance is a one time fee which will provide you with coverage for as long as you own the property and as long as a mortgage is unsatisfied. If you refinance, you will need to pay for a new Lender's Policy which is again, a one time fee. You need to purchase a new policy because it insures a new loan.
How is the cost of the insurance policy determined?
Title Insurance Rates are set by state law. Rates are based upon your sale price or loan amount, whichever is higher.
Title Insurance is generally calculated at the Basic Rate. However, discounted rates are also available if certain conditions are met. These discounted rates are called Reissue Rate and Substitution Rate. CLT’s Lowest Premium Guarantee ensures that you will automatically receive these discounts if your transaction meets the state requirements.
Pennsylvania, Enhanced coverage policies are state regulated just like the basic coverage policies. The enhanced coverage Basic Rate is 10% more than that of the basic coverage. The discount tiers apply to the enhanced coverage as well.
When comparing price quotes, keep in mind that you will have other closing costs besides the insurance premium.
Are there different kinds of title insurance policies and coverages?
There are two kinds of policies:
Lender’s Policy: The lender’s policy covers only the amount of the loan, which is usually less than the full property value. This policy would only be called into action if a defect in title became evident which effects the lenders ability to collect on their mortgage and/or foreclose to recover its principal and interest. This policy provides for loss and legal expenses of the insured, the lender, only. This protection remains in effect for as long as the mortgage remains unsatisfied.
Owner’s Policy: The owner’s policy provides protection for the owners of the property as well as their heirs for as long as they hold title to the property. If a valid claim is filed, in addition to financial loss up to the face amount of the policy, your owner’s title policy covers the full cost of any legal defense of the title. One type of coverage even increase in value over time so if your property value increase you still have adequate coverage.
There are also two kinds of coverage:
(Only in Pennsylvania)
Basic Coverage provides for defects in title existing at the time title is issued. Whereas the Enhanced Coverage provides additional insurance for certain existing problems, as well as some future events.
Some of the problems covered by the enhanced policy are: Building permit violations of previous owners. Neighbors building encroaching structures onto your land after you purchase it. Post-policy forgery or impersonation leaving you with no record title. Lack of actual physical access for both vehicles and pedestrians to and from your home. Subdivision law violations of the previous owner.
An additional benefit of the enhanced coverage relates to estate planning. With basic coverage, you would have to purchase a new owners title policy if you transferred your property to a trust when planning your estate. With the enhanced coverage, your existing title insurance would carry over to insure the trust.
Ordering Title Insurance
While most lenders and real estate agents will offer to order title insurance on your behalf with their preferred vendor, you have every right to shop around and pick your own company. While prices will not vary very much, the level of service and quality of work will and that can make the difference between a smooth closing process and a nightmare.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.