As you’re getting ready to close on your new home, it’s always a good thing to know what you’re looking at in terms of closing costs. For those of you who’ve already done your homework and have some idea of what to expect, it will come as no surprise that one of the largest components of those expenses is likely to be the title insurance you purchase. Even though you might know you need to get it, do you understand what it is and what protections it provides? If that inquiry seems daunting, I’ll puzzle you one more riddle. To further complicate matters, if you’re taking out a mortgage, did you know that you will not only be required to secure a Lender’s Title Insurance Policy, but you have the option (at least in NY) of also picking up an additional Owner’s Title Insurance Policy? What’s the difference between those policies? It’s wise to have a firm grasp on these concepts before you walk into the closing room just to make sure your interests are protected.
What is Title Insurance?
At its most basic level, title insurance protects the insured against a myriad of title problems that can hinder the transfer of a property. These are usually hidden defects that title searches somehow miss, which rear their ugly heads down the road. Some of the defects that title insurance can guard against include:
1. Forged deeds, mortgages, satisfactions or releases of mortgages.
2. False impersonation of the true owner.
3. Instruments executed under a fraudulent or expired power of attorney.
4. Deeds that appear, but it is determined they were conveyed without the consent of the grantor or delivered after the death of the grantor.
5. Property that was improperly deeded to a minor.
6. Outstanding rights not of record and not disclosed by survey.
7. Property descriptions that appear but are not actually adequate.
8. Instruments that were executed under duress.
In terms of logistics, in order to secure title insurance, an insured will pay a one-time premium, typically at the time of closing, in order to safeguard the property up to the amount of the policy for possible later claims related to the title being defective.
Leading into our next topic, I’ll pose this question to you – is the purchase of title insurance obligatory? Like so much in life, the answer depends. If you’re paying cash for the property, the answer is (typically) no, but if you’re taking out a mortgage, the lender will require a policy be purchased. Depending on where you live, securing an owner’s policy may be a requisite component to delivering good title, while in other areas it’s merely an optional add-on that you can purchase if you choose to do so.
What’s the difference between a Lender’s Policy and an Owner’s Policy?
Now that we have some basic understanding of what title insurance does, we need to look at the different types of policies available to you. As indicated above, if you are taking out a mortgage, you will absolutely be required to obtain title insurance in an amount equal to the amount of the loan. This type of policy is known as a lender’s policy. There are a couple important things to remember about a lender’s policies. First off, even though it’s the bank that will require a lender’s policy be secured, it should come as no surprise that you will actually be the one to pay for it – upfront at the time of closing. Second, you should recognize these policies only last until the loan is repaid. Once a lender’s policy terminates, you are on the hook for defending any title claims if you haven’t made alternative arrangements to protect yourself. Remember: lender’s policies protect the lender for the amount it has loaned, but it does not protect your equity in the property. Lender’s policies do not protect you, either directly or indirectly, but the lender alone against loss.
In light of that fact, owner’s policies are offered. These are policies, which as discussed above, are either mandatory or optional depending on where you live. In Western New York, there is no requisite that buyers secure an owner’s policy, but it is nonetheless a good idea to do so. Unlike a lender’s policy, an owner’s policy does as its name purports to do and protects an owner’s interest against possible title defects. An added benefit of owner’s policies is that, unlike lender’s policies which are limited in duration, these policies will last indefinitely. Although an owner’s policy cannot guarantee that no claims will ever be made, so long as you hold an interest in the property, your owner’s policy will provide you some semblance of protection against possible title claims that may arise.
This article is intended as a brief primer meant to give a general overview concerning title insurance. Please be advised that there are numerous nuances concerning title insurance that I’ve not covered in this article. If you have additional questions about those nuances, it’s a good idea to either study up on the topic or speak to a qualified professional. I’ll leave you with one final note. When compared to the cost of a standard lender’s policy, I’d urge that it’s usually advisable to obtain an owner’s policy to protect your own interests; the additional cost for that extra coverage is usually relatively small when compared to the lender’s policy, especially given the potential downside (even if slight) of a lengthy and expensive title challenge down the road.