Fees for title insurance policies are often the largest component of the closing costs for home buyers. A standard policy protects the insured against one of the many title problems that can hinder the transfer of a property. A one-time premium safeguards the property up to the amount of the policy and provides defense costs unless specifically excluded.
Many home buyers are confused about the difference between a lender's policy and an owner's policy. A lender's title policy will only cover the lender for the amount that is at risk for the lender, generally not the actual full amount of the purchase price. Virtually every lender requires title insurance for the mortgage loan and its purpose is to protect the lender.
Asking the right questions about title insurance may save buyers money when they buy a new home. Try to get a copy of the existing owner's title insurance policy if it was written within the previous ten years. Find out if any discounted rates "reissue rates" are available if you supply a complete, legible copy of the prior title policy. Discounts of up to 40% may be available on both the owner's policy and lender's policy.
Why title is insurance needed?
To protect one of the most important investments you will ever make – buying a home. A lender goes to great lengths to minimize the risk of lending money for the purchase of real estate. First, credit is checked as an indication of the borrower's ability to repay the loan. Then, the lender seeks assurance that the quality of the title to the property to be acquired and which will be pledged as security for the loan is satisfactory. The lender does this by obtaining A LOAN POLICY of title insurance.
Does the loan policy protect the borrower?
The loan policy does not protect the borrower. The loan policy protects the lender against loss due to unknown title defects. It also protects the lender's interest from certain matters which may exist, but may not be known at the time of the sale. This policy only protects the lender's interest. It does not protect the borrower. That is why a real estate purchaser needs an owner's policy, which can be issued at the same time as the loan policy.
What is a Lender’s Policy?
This is sometimes called a loan policy and it is issued only to mortgage lenders. Generally speaking, it follows the assignment of the mortgage loan, meaning that the policy benefits the purchaser of the loan if the loan is sold. For this reason, these policies greatly facilitate the sale of mortgages into the secondary market. That market is made up of high volume purchasers such as Fannie Mae and the Federal Home Loan Mortgage Corporation as well as private institutions.
The American Land Title Association ("ALTA") forms are almost universally used in the country though they have been modified in some states. In general, the basic elements of insurance they provide to the lender cover losses from the following matters:
1) The title to the property on which the mortgage is being made is either
- Not in the mortgage loan borrower,
- Subject to defects, liens or encumbrances,
2) There is no right of access to the land.
3) The lien created by the mortgage:
- is invalid or unenforceable,
- is not prior to any other lien existing on the property on the date the policy is written, or
- Is subject to mechanic's liens under certain circumstances.
As with all of the ALTA forms, the policy also covers the cost of defending insured matters against attack.
Numbers 1 and 2 are important to the lender because they cover its expectations of the title it will receive if it must foreclose its mortgage. Number 3 covers matters that will interfere with its foreclosure.
Of course, all of the policies except or exclude certain matters and are subject to various conditions.
There are also ALTA mortgage policies covering single or one-to-four family housing mortgages. These cover the elements of loss listed above plus others. Examples of other coverage’s are: loss from forged releases of the mortgage and loss resulting from encroachments of improvements on adjoining land onto the mortgaged property when the improvements are constructed after the loan is made.
What is an Owner’s Title Policy?
The owner's policy assures a purchaser that the title to the property is vested in that purchaser and that it is free from all defects, liens and encumbrances except those listed as exceptions in the policy or are excluded from the scope of the policy's coverage. It also covers losses and damages suffered if the title is unmarketable. The policy also provides coverage for loss if there is no right of access to the land. Although these are the basic coverage’s, expanded forms of residential owner's policies exist that cover additional items of loss.
The liability limit of the owner's policy is typically the purchase price paid for the property. As with other types of insurance, coverage can also be added or deleted with an endorsement. There are many forms of standard endorsements to cover a variety of common issues. The premium for the policy may be paid by the seller or the buyer as the parties agree. Usually this is stated within the real estate contract. One should inquire about the cost of title insurance before signing a real estate contract that provides that he (the buyer) pay for title charges. A real estate attorney, broker, title escrow officer, or loan officer can provide detailed information as to the price of a title search and insurance before the real estate contract is signed. Title insurance coverage lasts as long as the insured retains an interest in the land insured.
What Is The Danger Of Loss?
As an example, assume real estate was purchased for $100,000. A down payment of $20,000 is made, and a lender holds an $80,000 mortgage lien, or beneficial interest. The lender acquires title insurance protecting the lender's interest up to $80,000. But the purchaser's down payment of $20,000 is not covered.
What If Some Matter Arises Affecting The Past Ownership Of The Property?
The title insurance company would defend and protect the interest of the lender. The purchaser, however, would have to assume the financial burden of his or her own legal defense. If the defense is not successful, the result could be a total loss of title. The title insurance company pays the lender's loss and is entitled to take an assignment of the borrower's debt. The purchaser loses the down payment, other equity in the property that may have accumulated, and the property. And the balance on the note is still due.
How Can There Be A Title Defect If The Title Has Been Searched & A Loan Policy Issued?
Title insurance will pay for defending against any lawsuit attacking the title as insured, and will either clear up title problems or pay the insured's losses. For a one-time premium, an owner's title insurance policy remains in effect as long as the insured, or the insured's heirs, retain an interest in the property, or have any obligations under a warranty in any conveyance of it. Owner's title insurance, issued simultaneously with a loan policy, is the best title insurance value a property owner can get.
What Protection Does Title Insurance Provide Against Defects & Hidden Risks?
Title insurance is issued after a careful examination of copies of the public records. But even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge and experience of professional title examiners. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.
Here are just a few of the most common hidden risks that can cause loss of title or create an encumbrance on title:
- False impersonation of the true owner of the property
- Forged deeds, releases or wills
- Undisclosed or missing heirs
- Instruments executed under invalid or expired power of attorney
- Mistakes in recording legal documents
- Misinterpretations of wills
- Deeds by persons of unsound mind
- Deeds by minors
- Deeds by persons supposedly single, but in fact married
- Liens for unpaid estate, inheritance, income or gift taxes