Real estate agents are often the first professionals that consumers turn to when they have a question or concern about their home purchase. While they may have lots of great advice, real estate agents may not always understand the ins-and-outs of other aspects of the closing like title insurance. Here are some common questions and answers about title insurance to share with homebuyers.
WHAT DOES TITLE INSURANCE COVER?
When buying a home, consumers can be easily confused by all the different types of insurance available to protect their investment. It’s important to highlight each type of insurance they’ll see related to their home, which include:
- Home insurance
- Mortgage Insurance
- Title Insurance
Title insurance protects property rights
One function of a title company is to determine who has the right to sell a property and if there are any encumbrances (or liens) on it that would threaten the rights of a new owner to possess and modify the property.
These problems are called title defects and are usually found during a title search. Some defects may not be found before closing, so the title insurance policy that is issued sets specific guidelines on what problems will be covered if they are discovered later.
Unlike home insurance, it doesn’t protect against future calamity on the property itself. Instead, it provides coverage for past issues that went undiscovered before purchasing the property.
Examples of common defects include an undisclosed lien, a dispute over boundary lines, fraudulent or illegal deeds, omitted heirs, and errors in the public record. Without title insurance, homeowners are left to settle these disputes in court on their own. They also risk losing their home if someone else can prove rightful ownership.
There are two types of title insurance:
- The Lender’s Policy
- The Homeowner’s Policy
The lender’s policy protects the bank or mortgage company that’s providing the loan for the home purchase. It will cover the amount borrowed in case of title defects and is mandatory to receive financing. The homeowner’s policy protects the homebuyer’s equity or interest in the property.
HOW CAN I SAVE MONEY ON TITLE INSURANCE?
The title search and subsequent title policies are one of the many items of closing costs. Both the lender and homeowner’s policy must be paid by either the seller, the homebuyer, or split between the two. Who pays for title insurance can depend on your area and whether the market favors buyers or sellers.
Three states (Florida, Texas, and New Mexico) have state-mandated rates for title insurance, so these tips won’t be helpful there, but for the rest of the country, consider the following when purchasing or refinancing your home:
- Comparison shop– The lender may suggest a title company to work with, but you can choose your own. Your Realtor or friends who have closed on a property may also have some suggestions, but be sure to contact other companies in your area to see if you can find a better deal for title and escrow services first. Many title companies have websites with rate calculators that give you a quote to make it easier to compare prices. Just be sure to also find out what sort of defects are covered in their standard policy.
- Ask for a reissue rate– If you are refinancing, you may qualify for a reissue rate. If you’re buying a home, you may be able to secure a discounted rate if the title agent can include proof of the previous title insurance policy. In Florida, title agents are allowed to offer a reissue rate to home sellers for a sale/purchase within three years or at any time for a refinanced loan of a previous policy.
- Request a simultaneous issue discount – If you’ll be purchasing both the lender’s and the homeowner’s title policies, there’s a chance to get a discount when using the same title company for both. 76% of title agents issue policies simultaneously.
Be sure to review your Loan Estimate and Closing Disclosure carefully. Government regulations for how these costs and discounts are displayed, like simultaneous purchase discounts, can be confusing, so don’t hesitate to reach out to the title company with any questions.
WHEN SHOULD A BUYER OPT FOR MORE PROTECTION?
The title commitment or preliminary title report will serve as the blueprint for the future title policy, so review its requirements, exceptions, exclusions, and endorsements. You’ll also be able to see any current liens or mortgages on the property as well as information on governing homeowner’s associations, easements, utility rights, and other items. After closing, if any other liens or mortgages appear in the public record, the title company will have the responsibility of clearing them.
The Basic American Land Title Association (ALTA) residential policy should be sufficient in most cases but each property is unique in its ownership and land improvement history. Depending on the characteristics of the property, you may want to ask about additional coverage, endorsements that can be added to the policy, or how to remove an exception.
For instance, in underdeveloped rural areas, there may be a question regarding your right to use a private road to access parts of your property. Without a land survey confirming the right of way, many title insurers will require this type of boundary issue be listed as an exception for coverage. Removing the exception will take additional steps and may incur a cost.
Many title companies and underwriters offer upgraded coverage that might include:
- Zoning coverage – protects the policyholder should they be forced to remove or remedy an improvement because it violates zoning laws.
- Encroachment coverage – protects the policyholder from someone building a structure that crosses into the insured property.
- Building Permit Violation coverage – protects the policyholder should they be required to remove an existing structure built by the previous owner who didn’t obtain the proper permits.
- Restrictive Covenant Violations coverage – protects the policyholder against loss should an association or other governing body enforce an existing restrictive covenant due to a violation that occurred before the policy date.
The list of potential endorsements goes on, so be sure to ask about how these may be relevant to your property and policy. If purchasing an upgraded or extended coverage policy, endorsements may not be necessary as the exceptions listed in a standard policy are usually absent.
All title insurance policies cover the state of the title to a home as of the effective date, which is usually the same date as the closing. If any liens or claims come up after closing related to actions occurring after that date, your title policy won’t cover it. If the issue started before you owned the property, be sure to give your title company a call.