Real Estate Title Insurance Explained
When purchasing a home one of the things that buyer’s will be asked is whether or not they want Real Estate title insurance. Often times I find that home buyer’s lament over this decision because of the expense involved. Real Estate title insurance is certainly not cheap!
While title insurance is a one time expense, it can be disturbing for a buyer tight on cash to have to come up with such a large unexpected expenditure. Real Estate title insurance can easily run into thousands of dollars in a home purchase. Unlike other insurance policies there is no monthly premiums with title insurance. It is a one time expense covering the owner until the property is sold.
One of the questions I get asked a lot by my clients is “should I purchase title insurance’?
Let me first explain what title insurance is and what it covers. Real Estate title insurance is a type of insurance that covers financial loss from defects in title to real property and from the invalidity of mortgage liens.
A title policy is put in place to protect an owner’s or lender’s financial interest in a property against loss due to title defects, liens or other matters. The insurance will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the monetary loss incurred, up to the dollar amount of insurance provided for in the policy.
In my experience all major lenders require title insurance to protect their interest in the mortgage secured by real estate. This is called a lenders insurance policy. An owner’s insurance policy is not required but in my opinion is a highly valuable insurance that is risky not to have.
There is an opportunity for a buyer to get a substantial discount when they purchases both a lenders and owner’s policy at the same time. This is called a simultaneous issuance. For an enhanced policy, it runs about $4.00 per thousand based on purchase price + $175.00 in Massachusetts. This is a one time premium paid at closing which lasts the lifetime of the property ownership.
The Real Estate Title Search
Prior to a buyer taking title to a property or completing the “closing”, the lender through which the borrower is getting the mortgage will have a title search done on the Real Estate.
The purpose of the title search is to find any defects in the title. There could be any number of defects including liens, unpaid Real Estate taxes, judgments, unpaid condo fees, or others.
If title defects are found the buyer’s or lender’s lawyer will inform the buyer of such defects and then work towards getting them removed so that a clean and marketable title is given to the buyer.
Title insurance becomes of great value when something is discovered in the future that was not found when the initial title search was done.
A Title search starts with the most recent deed searching the grantees name (the person who holds title) back in time until the deed from which the grantee acquired the property is found.
That grantors name is then searched back in time in the grantees book to find when the grantor acquired the title as grantee. The typical title examination goes back fifty years but title insurance would cover beyond the fifty year search.
Anyone who has not purchased title insurance could surely tell you what a nightmare it can become without it!
Common Reason For Title Insurance Claims
- False impersonation of the true owner of the property
- Forgery of the deed, releases, or wills
- Real Estate fraud
- Missing or undisclosed heirs to the property
- Any Instruments executed under invalid or expired power of attorney
- Mistakes in recording legal documents
- Deeds by someone of unsound mind
- Deeds by a minor
- Misinterpretations of wills
- Deeds with misrepresentation of marital status
- Liens for unpaid estate, income, inheritance, or gift taxes
For an astute buyer who really thinks about the expense of title insurance the follow up question I get is why do I need it if the lender is going to have a policy anyways?
The easiest way to answer this question would be to ask is what would you do if one of the above title defects were discovered and the attorney who did the title search was no longer in business? While you could certainly sue the attorney for negligence if he was still around practicing; what if he was not? You would have a very large issue on your hands! To be clear an attorney would only be responsible for negligence not the issues outlined above. This is why it is important to have title insurance!
One other important note about Real Estate title insurance:
A federal law called the Real Estate Settlement Procedures Act (RESPA) allows the individual homeowner to choose a title insurance company when buying or refinancing residential property. Most of the time, homeowners do not make title insurance decisions for themselves.
They are typically handled by their lender’s or attorney’s choice; however, the homeowner does retain the right. RESPA makes it unlawful for any lender, attorney, or Real Estate agent to mandate that a certain title insurance company be used. Doing so is a violation of federal law and any person or business doing so can be heavily fined or lose their license.
Section 9 of RESPA denies a seller from mandating a home buyer to use a specific title insurance company, as a condition of the sale. Buyers may sue a seller who violates this provision for an amount equal to three times the cost of all charges related to the title insurance.
Some of the most prevalent title insurance companies are Fidelity National Financial, First American, Land America, Stewart and Old Republic.
In my mind having an owners insurance title policy is a no brainer and is certainly something you should consider unless you absolutely can not afford it! A title policy can be purchased in the future should you not have the funds available at closing time.
About the author: The above Real Estate information on Real Estate title insurance was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at firstname.lastname@example.org or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 25+ Years.
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I service the following towns in Metrowest MA: Hopkinton, Milford, Southboro, Westboro, Ashland, Holliston, Medway, Franklin, Framingham, Grafton, Hopedale, Mendon, Upton, Northbridge, Shrewsbury, Northboro, Bellingham, Uxbridge, Millbury, Worcester, Sutton and Douglas.