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You picked your dream house. Your offer has been accepted and a home inspection completed. Now your attorney contacts the title insurance agency. You might be wondering, “Do I need title insurance?”
“Besides life insurance, it’s the one insurance you will buy that you hope you never have to use,” says Mike Carella, Founder and Owner of Evident Title Agency. “If a claim comes in on title insurance, it’s usually going to be hundreds of thousands of dollars.”
If you’re looking to buy a home, find out everything you need to know about title insurance as Mike answers your FAQ below!
Question #1 – What is title insurance?
Title insurance is one of the closing costs when buying a home and is comprised of two policies. The first type of title insurance is the owner’s policy.
“The owner’s policy ensures the owner legally owns the property and that is also free and clear of any liens, judgements, or encumbrances that could possibly affect the property,” says Mike, who has been in the field for almost two decades.
What this means is – the current owner can sell the property without additional debts or payments that would need to be made by the new owner.
“In other words, if you put a mortgage on that property, you owe the mortgage,” says Mike. “If you buy it in cash, you owe nothing on that property, and that’s what we insure.”
The second policy is the lender’s policy, which protects the lender. Since the lender is leasing the buyer money, they want to make sure the buyer can legally borrow money against this property.
“We ensure the mortgage lender that they are in a first lien position on the property,” says Mike.
[In insurance speak: If there is a foreclosure on a property, whoever has the first lien on the property gets paid first – except for taxes. “The government always gets paid first,” laughs Mike.]
Question #2 – Who buys title insurance – the buyer or the seller?
During most home purchases, the buyer is the one who pays for title insurance as the buyer is the one who benefits from it. However, this does vary from state to state.
Question #3 – Why does a seller need to have title insurance?
During a sale, the seller’s initial title policy can be handy should an encumbrance be found on the property. In certain cases, title insurance agencies can use that original policy to clear issues on title.
An owner’s policy is not required, so a seller may not have one from their original transaction. Sellers do not need a policy when they are selling, but in certain states, like Florida and Texas, the sellers are the ones usually required to buy the title insurance policy on behalf of the buyers, as per their real estate contract.
Notes Mike, “I guess the way they look at it is – when you’re buying, you don’t have money, but when you’re selling, you do.”
Question #4 – Does title insurance differ from state to state?
“The concept is the same, but the procedures and how it is handled are completely different,” says Mike.
Each state has its own individual land use laws. When choosing a title insurance agency, choose one that has experience working in the state you are buying the home. The agency doesn’t necessarily need to be based out of that state as long as they have the correct knowledge and experience.
Question #5 – Should I purchase title insurance when buying a house?
“If you’re getting a mortgage, you’re getting title insurance whether you like it or not,” says Mike.
When buying a home with a mortgage, buyers are not mandated to acquire the owner’s policy (though you should and we’ll explain why below!), but the lender is going to make a buyer purchase a lender’s policy.
Question #6 – Is buying title insurance for a property worth it?
Unequivocally yes. Title insurance helps to protect a new homeowner from financial loss.
“We find encumbrances on properties every single time,” says Mike. “For instance, a judgment can be placed against a property that the sellers knew was coming and didn’t disclose. When the new owner goes sell their property, it would become their burden to clear the judgement to insure the new owners’ free and clear title.”
A second mortgage, an open line of credit, money owed on a line of credit – numerous title issues can arise, and after closing, the new owner would have to pay in order to sell or refinance the house.
Also, title insurance protects the new homeowner against someone claiming ownership or anyone claiming that money is owed.
Question #7 – How long does title insurance last?
“We insure for as long as you own the property, whether you own it for six months or 600 years.”
Question #8 – What much does title insurance cost?
“Title insurance is a one-time fee that lasts as long as you own the property,” says Mike. “It’s a very tiny cost when you think of the term of the actual policy.”
Title insurance costs are state regulated on a sliding scale, so every title company should charge roughly the same amount.
“However, some people interpret the manual differently,” says Mike, “and there’s fees that some agencies should be charging and others may overcharging. But all title insurance should be around the same price, give or take a couple hundred bucks.”
To find the cost for your next purchase, download the Evident Title Agency app with a title insurance calculator!
Question #9 – How does a title insurance company procure the property information?
“If we have to go back far enough, we can search back as far as the end of the Revolutionary War and the 1783 Treaty of Paris when the property was actually deeded over to generals and other prominent people,” says Mike. “Land records can even go back to the original dedication of land from the royal family.”
For most title insurance policies, Mike’s team searches public records in three areas:
- at the municipality level for property taxes;
- at the county level for mortgages, liens, and (some) judgements;
- and in the upper high courts for judgements.
Title insurance agents also conduct “a chain of title” search, first finding a copy of the most current deed and then working backwards. This ensures the property has been legally conveyed through each transfer of ownership.
“We go back 60 years to make sure that every time the property was conveyed, it was conveyed correctly from one person to the next,” says Mike.
Mike’s team will also search the Surrogate’s Office if a homeowner died to make sure everything with the estate was handled correctly.
The entire process takes approximately three to five days to complete.
Question #10 – Do I need to worry about a title insurance agency joint venture?
“Lately, real estate agencies have been teaming up with title agencies to create what is called a joint venture,” says Mike. “The problem with joint ventures is the biases on why they are formed. The main reason for a joint venture is to capture more revenue on a transaction that the real estate agent already has an influence on.”
Some of these agencies may not know the local laws or places to search, and if liens get missed, then the homeowner can have issues when trying to sell or refinance the home.
“You may also find out in 10 years from now that the title agency no longer exists, and then you’ll have to chase down the underwriter.”
Mike suggests you complete due diligence, look up the company, see how long they have been in business, and see if they have any claims against them.
“You can call their underwriter and see how long they’ve been in business,” says Mike. “They also have to disclose if they are involved in a joint venture. A real estate agent’s fiduciary responsibility to the buyers is the buyers’ best interest, so you want to make sure that the agent doesn’t have their best interest in mind.”
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