Do You Really Need Title Insurance?
One of the larger settlement charges you are likely to encounter when you purchase real estate is for title insurance. There is typically a charge for an owner's policy and a lender's policy (if you are financing the purchase). Almost all lenders will require the buyer to obtain title insurance to protect their interest in the property - which is also a sign of how important they think it is. The owner's policy is optional, but when it is bought together with the lender's policy, it is offered at a discounted rate.
What can go wrong?
Plenty.
- The seller may have bought the house ten years ago with a relative, but they haven’t talked to them in years. Now, they are unaware they need the relative’s signature to sell.
- The problem could go back even further than the current seller. Maybe the seller bought the place from a single woman without realizing that the ex-spouse did not sign off on the sale.
- Maybe the seller inherited the house under the terms of a will, but years later it is discovered that the will was out of date and the newer will left it to another heir.
- On new construction, if a contractor didn’t get paid, they can file a lien on your property even after closing. Title insurance will give you protection against this.
Without title insurance, you could be at risk of losing your entire property.
Lenders vs Owners policy
Most lenders require mortgagee title insurance as security for their investment in real estate, just as they may call for fire insurance and other types of coverage as investor protection. When title insurance is provided, lenders are willing to make mortgage money available in distant locales where they know little about the market.
Owner's title insurance lasts as long as you, the policyholder - or your heirs - have an interest in the insured property. This may even be after you have sold the property. In Virginia it is customary for the purchaser to pay for the lender's title insurance policy as well as their owner's policy. If an owner's policy is purchased, however, you will be able to pay a smaller simultaneous issue charge (typically $150) for the separate lender coverage.
What does your premium really pay for?
An important part of title insurance is its emphasis on risk elimination before insuring. This gives you, as the policyholder, the best possible change for avoiding title claim and loss.
Title insuring begins with a search of the public land records affecting the real estate concerned. An examination is conducted by the title agent or attorney on behalf of its underwriter to determine whether the property is insurable. The examination of evidence from a search is intended to fully report all 'material objections' to the title. Frequently, documents that don't clearly transfer title are found in the "chain", or history that is assembled from the records in a search.
Here are some examples of documents that can present concerns:
- Deeds, wills, and trusts that contain improper wording or incorrect names.
- Deeds that were recorded by a trustee due to a foreclosure of the property.
- Outstanding mortgages and judgments, or a lien against the property because the seller has not paid his or her taxes.
- Easements that allow construction of a road or utility line.
- Pending legal action against the property that could affect a purchaser.
- Incorrect notary acknowledgments.
Through the search and examination, title problems are disclosed so they can be corrected whenever possible. However, even the most careful preventative work cannot locate all hidden title hazards.
Like most types of insurance, it may seem like a waste if it is never used. It is rare you would ever need title insurance, but when you do need it, you really need it.
