If you’ve refinanced your mortgage, or got a purchase loan when you bought a home recently, you probably remember signing a whole stack of paperwork at the closing. And if you’re like most people, you probably weren’t crystal clear on every single item and document you signed when it came to title and escrow, but you felt comfortable enough to go forward.
In fact, one of the least understood and rarely talked about components of any mortgage loan and home purchase is title insurance, and yet it is so vital that it may be one of the most important items you sign! So today we’ll answer the top 10 questions about title insurance.
- What is title insurance?
When you buy a home (or refinance), you are granted certain benefits of home ownership, like being able to use and occupy the property, only be obligated by any legitimate debts and encumbrances that you knew about and agreed to, and that you’re free to sell the property or take out loans against it as you wish.
But what if something goes wrong? Title insurance is put in place to make sure you are still legally ensured those benefits. Title insurance is a policy that protects against loss if there’s a problem with the condition of the title of the land (and residence, lot, building, etc.) that was purchased in a real estate transaction. Title insurance is a protection for you and your lender that the property is what it claims, is yours, and no one else has a claim, lien, or encumbrance. Think of it as your proof of ownership.
- What does title insurance actually insure against?
In a nutshell, title insurance is a guarantee to you, and your lender, that you’re protected against any losses from defects in the title (errors or overlapping claims) that occurred in the public records when you bought or refinanced.
Possible defects in title might include:
- Errors or omissions in deeds
- Mistakes in examining title records
- Forgery
- Undisclosed heirs
- Missing heirs
- Liens for unpaid taxes
- Liens by contractors
- Accessibility to property
- Why is title insurance necessary?
Title insurance takes the risk of nebulous legal ownership or debt out of buying your home or refinancing. Since your home will probably be the biggest investment you make in your life (along with “buying” your mortgage), it’s crucial that you’re protected. If someone challenges your title to the property – that is, your legal ownership and use – title insurance and the title documents that are backed up by due diligence will be there to protect you and fend off claims. Just as importantly, if a claim arises that IS legitimate, but you had no knowledge of it, title insurance will pay out the claim to make it right but also make sure you keep the property and its use.
- How does title insurance differ from homeowner’s insurance, casualty or other types of insurance?
Title insurance is a very specific kind of guarantee. It’s totally different than homeowner’s insurance, which covers against general claims and losses due to natural disasters, home malfunctions, fire or lightning, theft, vandalism, and personal liability claims brought against you by others. Homeowner’s, casualty, and other types of insurance also have ongoing premium payments and can be renewed/cancelled/modified, etc., while title insurance is in force as long as you hold the house (and the loan), with all of the work to identify and eliminate risk with the property occurring before you assume legal ownership.
- Why does a homeowner need a title insurance policy and a lender need its own policy?
Both the owner and the lender need their own title insurance policies in any real estate transaction or issuance of a mortgage loan. Since there are two separate policies, the interests of both the lender and the owner are protected against title defects, though there are specific differences. Of course there is great overlap in interest in the property, but remember that most mortgages don’t equal the full replacement cost of the property.
- What would title insurance do for a homeowner if there were a problem after the sale?
Most problems are identified and resolved before the transaction every closes (as title insurance is supposed to do), but in rare circumstances there are issues that arise. A homeowner’s title insurance would cover the legal cost of defending their interest in the property and resolving the matter. It would also cover indemnification against losses causes by any claims. Remember that anyone can make a claim against title or take a case to court – whether or not it’s right or justified – so it’s essential to be insured.
- Who pays for title insurance?
In California, the division of payment for title insurance policies varies from place to place. But generally, in northern California it’s customary for the real estate buyer to pay for their own title insurance policy – though in some counties the seller may split the cost. The cost of a title insurance premium is written into the closing costs of the transaction. It’s usually the buyer’s choice what title company they’d like to use.
The borrower also pays the lender’s title insurance policy premium as part of their standard loan costs.
- How long does coverage last?
Your title insurance policy lasts as long as you have an interest in the property. When you pass away the title coverage automatically extends to your heirs. And if you sell the property, your title insurance policy adds a level of warranty or protection to the next buyer, like links in a strong chain.
- How are premiums paid, and for how long?
With most other types of insurance, you pay premiums every month or year on an ongoing basis as long as you hold the property or benefit being received. But with title insurance you pay only once – when the policy is originated and at the close of escrow before the real estate transaction is concluded.
There are never any additional payments or premiums due. The amount you pay for title insurance depends on the dollar amount of coverage provided, which we’ll go over with you in detail on your Good Faith Estimate and other mortgage paperwork – but all charges are standard and fair and we use only the best title companies.
- What exactly is covered by title insurance?
There are several types of policies, but these are some of the basic risks covered:
- Forgery and impersonation;
- Lack of competency, capacity or legal authority of a party;
- Deed not joined in by a necessary party (co-owner, heir, spouse, corporate officer, or business partner);
- Undisclosed (but recorded) prior mortgage or lien;
- Undisclosed (but recorded) easement or use restriction;
- Erroneous or inadequate legal descriptions;
- Lack of a right of access; and
- Deed not properly recorded.
- An extended coverage policy may be requested to protect against such additional defects as:
- Off-record matters, such as claims for adverse possession or prescriptive easement;
- Deed to land with buildings encroaching on land of another;
- Incorrect survey;
- Silent (off-record) liens (such as mechanics’ or estate tax liens); and
- Pre-existing violations of subdivision laws, zoning ordinances or CC&R’s.
- Subject to availability in your locale, First American’s EAGLE Policy covers all of the risks listed above, plus:
- Post-policy forgery;
- Forced removal of improvements due to lack of building permit (subject to deductible);
- Post-policy construction of improvements by a neighbor onto insured land; and
- Location and dimensions of insured land (survey not required).
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If you have any other questions about title insurance – or the mortgage loan process and how much you might save with a refinance – please contact us. We’re happy to help!