A young couple recently closed on their first home. They were amazed by the amount of paperwork that was required to be signed, as well as the number of fees and costs associated with the closing. “Why do we need this Title Insurance?” they asked. The answer is vitally important and should be understood by anyone looking to buy a new home.
Similar to car and life insurance, title insurance helps to protect the buyer of a new home against any unforeseen issues with regard to their property rights and potential claims of others. These issues can sometimes pop up years after purchasing the home and can be extremely costly to correct. Potential title issues range from liens and judgments that have attached to the property, but in more serious circumstances can even include adverse claims by neighbors or others to the property itself.
Title insurance typically encompasses two types of policies- (1) the Lender’s Policy, and (2) the Owner’s Policy of Title Insurance. Lenders will require a Lender’s Policy of Title Insurance as a matter of course in order to protect their interest in the Property (e.g. their mortgage), but the Owner’s policy is optional. Unlike other types of insurance however, no recurring premium is required. This is a one-time payment (made by either the buyer or seller based upon the terms of the Contract for Purchase-Sale) that is made at Closing, and collected by the Closing Agent/Title Insurance Agent, and the amount of the payment is based upon the sales price. Whether you are closing with a Title Company or an Attorney who happens to be a Title Agent, the charge is set by statute and does not change. So, unlike what some real estate agents or title companies may tell you, you can have a licensed attorney handle your closing and issue your title policies without paying more. In fact, due to ethical restrictions on attorneys, you can also be assured that an attorney has not paid any incentive (e.g. referral fee to the real estate agent, etc.) to be designated as your closing agent and owe duties to both sides of the transaction to ensure that it is handled properly. Be aware that title companies are not held to the same ethical standards, and they often times have more allegiance to the real estate agents than you as the Buyer/Seller.
When purchasing a home, the seller typically signs over a Warranty Deed which conveys the seller’s interest the true owner and that the title is free of any known defects. The problem arises when there are unknown liens or defects in the title. A mistake by the title examiner or the failure of a past owner to record a deed may lead to a broken chain of title. This can result in a lengthy and expensive legal process to correct. That’s where title insurance comes in. At that point, the insurance company will step in and pay for these procedures (usually up to the amount of the purchase price).
As mentioned above, title insurance is a one-time payment made usually at the closing. The price can vary, but it is generally dependent upon the purchase price and the premium. For example, the purchase of a $200,000 home in Florida can expect about $1,000 for the title policy. While that might seem like a lot at first glance, it pales in comparison to the thousands of dollars it would take to litigate a title issue without insurance. For this reason, home buyers should seriously consider making this one-time investment. Even if it is never actually needed, the old saying goes, “It’s better to be safe than sorry”.