A home is often a person’s most significant asset, so it makes sense to keep it insured. Right? Hazard insurance, otherwise known as homeowners insurance, is most popular. If in a flood hazard area, then lenders will require flood insurance. Even if the property is on the coast, then wind & hail insurance may be necessary, but did you know that there are circumstances that could threaten the property’s ownership or mortgage position? That’s where title insurance comes into play. The most simple definition is that this ensures the title search performed on the property.
There are two types of this insurance we will discuss: Owner’s and lender’s title insurance.
What is Title Insurance?
A title search must be completed to obtain insurance. The purpose of a title search is to ensure that both the owner and lender have clear title. A real estate attorney or title company performs the search before a real estate closing. A full title search typically means searching back 40 years, but there are reasons for shorter or longer searches. The level of the search depends on the circumstances and what the attorney feels is necessary. Areas searched include:
- History of ownership (chain of title)
- Property tax payments
- Access to property (easement)
Title Search Determines Property Status
When lenders are involved, a title search is required. Although, too often family to family transactions do not have a title search performed. For instance, a family member may gift all or a portion of a property to another family member. So, they trust everything should be okay. Later, once the new owner tries to obtain a mortgage and a search is performed, there may have been family members who didn’t sign the deed such as overlooked heirs, unrealized liens, or an outstanding mortgage that was forgotten. This clouds title for the new owner and either affects ownership or ability to borrow.
24-month chain of title
A common lender request to the attorney or title company includes specifically stating who has owned the property over the last 24 months. Lenders are looking for things that look fishy. In other words mortgage fraud areas, but there are other areas lenders care about such as property flips. Property flips involve investors who purchase a home, usually renovate it, and then sell for a higher price. FHA loans have a rule in place preventing a loan within 90 days of the seller’s date of ownership. This is called the FHA flipping rule.
The best course of action is to request a title search, but what if something is missed in the search? That’s where insurance is key and you will see why lenders require it. Lenders provide billions of dollars in loans, so they know just how important insurance can be. Property owners should follow the experienced lenders as well for protecting this huge asset.
Lender’s Title Insurance
If buying or refinancing a property, whether strictly land or with a home, a lender will require their lien position is insured. What does that mean? A lender providing a first mortgage loan must verify their lien is in first position. Therefore, if there is an existing mortgage on the property, it must be satisfied before or at closing. Otherwise, the new loan would be in second or worse position. When lenders are providing first mortgage rates, they require first lien position. Additionally, the most important reason comes to foreclosure. In the case of foreclosure, whoever is in first position, gets paid first.
Lender’s title insurance does what it says – it insures the lender against anything missed during the title search or legal claims against the owner’s property. The title search states the ownership and lien status of the property, then title insurance protects the lender in case something was missed. Finally, the lender will require insurance in the amount that fully covers their loan size. If the loan amount is $200,000, the lender’s policy must be $200,000. Does the lender pay for the lender’s insurance? Sorry, but no. This is a borrower cost, and yes, it protects the lender. But, the borrower must pay it for the lender to provide the loan.
Owner’s Title Insurance
When a loan is involved, the lender requires the lender’s coverage. Another optional coverage is owner’s title insurance. The property owner may purchase additional coverage which protects the owner against the same areas that lender’s coverage does. Typically, an owner’s title insurance is optional. Although, owner’s coverage is the smart and safe way to go. Just like lender’s insurance, owner’s coverage insures an owner against others filing a claim against ownership as well as possible errors in the title search. If a loan is involved, the owner’s insurance cost is based on the amount of insurance over and above the loan amount. Here’s a simple way to show how lender’s and owner’s title insurance work together.
Owner’s Title Insurance Example
Let’s say the purchase price is $400,000 and the first mortgage loan is $250,000. Lender’s title insurance coverage would be $250,000, and the owner’s policy would be $150,000 (the difference between the price and first mortgage loan amount). Now, the owner’s insurance would cover the full $400,000 purchase price, but the cost is based on the $150,000. Although, remember the owner pays both the lender and owner coverage.
Cash buyers save the cost of a lender’s policy. Let’s use the $400,000 purchase example. The owner’s policy would be $400,000. Thus, the owner’s title insurance cost is based on the $400,000 price rather than splitting between lender and owner costs.
Title Insurance Cost
How much does this insurance cost? It varies based on the state, insurance coverage amount, and the company providing the insurance. The insurance premium may be entirely different in each state. North Carolina is one of the cheapest states for title insurance premiums. Many title companies provide very helpful insurance calculators to figure the cost. Just enter the price, loan amount, state, and a few other items.
How Often Do I Pay Title Insurance?
Title insurance is an up-front, one-time payment. There is not an annual or monthly premium. As long as the loan exists, the lender’s policy is in effect. Plus, the owner’s policy is in place for the length of ownership. Some states even offer an additional benefit of increasing coverage over the years allowing for potential appreciation, but obtaining another loan usually means paying the lender’s title premium again.
A common question during a refinance is “Why am I paying for title insurance again?” That’s a great question. First of all, there will not be another owner’s premium because ownership has not changed. The original owner’s policy still exists, but there will be another loan amount and probably even another lender. Another common question from borrowers is “Why is there another title search when I had one done before?” Another great question! Lenders don’t know if you have gotten another mortgage, a line of credit, got married, got divorced, or filed for bankruptcy. These and more affects title. So many things could happen since the prior title search which could affect a lender’s position against the deed.
Reissue Rate for Title Insurance
There is one way that owners/borrowers can save money on title insurance – a reissue rate insurance. If there is a title insurance policy in place and it was recently, the new title policy can attach to the prior one. First, the person performing the title search usually has to search back to the previous title policy. Next, since the new title policy only has to insure back to a recent policy, the premium is cheaper.
An owner or buyer should always ask the title company or attorney if a reissue rate is available. Although, always ask if a limited title search with reissue rate is best. There could be reasons for performing a more thorough search.
Title Insurance Tips
It is always a good idea to put all real estate paperwork in a safe place. Sure, your lender or closing attorney should have a copy of the documentation, but it may take a while to retrieve it. Keep closing papers, title policies, insurance policies, will, healthcare power of attorney, etc. in a safe place.
Refinance Tip: If considering a refinance, provide a copy of your current title insurance policy to the closing attorney or title company. As mentioned before, the title search is less intensive and a reissue rate may save the borrower money.
Selling Tip: If selling a home, provide a copy of the title policy to the listing agent. The agent could then pass it to the buyer’s attorney. Thus, potentially lowering the buyer’s closing costs. Additionally, it may make the title search an easier process for the closing attorney.
Buyer Tip: Ask the closing attorney or title company for a reissue rate.