Home Buyer Turns Down an Owner’s Title Policy. What Could Go Wrong?

Your deed is a valuable document. But does your deed assure you that you hold the title free and clear of a past owner’s obligations?

A title search looks at court documents, bankruptcies, deaths and divorces, and unpaid secured debts. Any title problems should surface during the title search if you’re getting a mortgage. Once problems are found, they should be resolved before you close and receive the keys.

But now and then, something gets missed. And missed details can surface days, weeks, months, or years after closing.

So let’s talk about the value of an owner’s title insurance policy.

True Story: Betty’s Unpleasant Surprise

Here’s a real story from the American Land Title Association (ALTA) about Betty, who purchased a home, financing half of its value.

Betty had to pay for a lender’s title insurance policy, to cover the bank’s interest in the good title of the lender’s collateral — Betty’s new home. Paying for the lender’s title coverage is a standard part of a mortgage borrower’s closing costs.

When the question came up, Betty declined to buy an optional owner’s policy.

This proud new home owner soon found out that a court recorded a $20,000 lien on the seller’s title just before she closed and recorded her new deed. Her seller, who owed the money, was nowhere to be found. Betty was forced to pay $20,000 to avert foreclosure.

This didn’t have to happen. Betty could have bought an owner’s title policy, just in case a party had filed a lien that didn’t show up in the search. Then the title policy would protect Betty in case of legal action to resolve the lien. Betty could have even ordered an add-on to cover the gap from the title search to the formal deed transfer.

But Betty’s case was a rare fluke, right?

Not exactly. Last year, says ALTA, title insurers spent $673 million in payouts on behalf of shocked deed holders like Betty. In other words, some buyers do wind up using their title insurance policies.

When a seller gives you a warranty deed, that’s an assurance you’re getting a marketable title. Ask the title company that issued the warranty for assistance resolving title disputes.

Title Insurance Is a Hedge Against Unpleasant Surprises

Your lender isn’t taking chances. Lenders hold title policies (which buyers pay for) as shields from risk.

As the home buyer pays the loan down, the lender’s risk diminishes. And the coverage shrinks. A paid-off mortgage has no lender’s coverage left at all.  

In contrast, a policy that names the home buyer as its beneficiary is good throughout ownership.

This owner’s title policy will be there for the homeowner if it turns out that the title company missed something when it ran the title search. The policy covers a deed holder in case of:

• Any liens left unresolved by a prior owner. These might involve unpaid property taxes, fines imposed by a homeowners’ association, or a contractor’s unresolved bill.

• Unknown breaches of zoning or local regulations.

• An overlooked co-owner or heir.

• Disputed access rights, or an unexpected easement that keeps the owner from doing what they’d planned to do on the land.

• An old court order, left unresolved by a prior deed holder.

• Errors in paperwork, such as a missing signature on a past deed transfer or a mistake in the property description.

It’s possible that a home has undisclosed but recorded liens stemming from local services provided to a past deed holder, or any of the above-listed issues.

An extended (sometimes called enhanced) owner’s title policy covers more than a company’s standard policy covers. This sample comparison, published by Federal Title, breaks down one company’s standard and enhanced title policy coverage.

Check with an agent about the policy you’re looking at buying. Ask if you’re getting coverage for inflation, trust beneficiaries, post-policy forgery, swindlers who impersonate deed holders to exploit their home equity, encroachments after the purchase, certain local restriction problems, a prior owner’s missing work permits, unrecorded easements, or property survey mistakes. Make it a point to understand what deductibles come into play, and what endorsements you might need for your own situation.

Bottom line: an owner’s title policy provides support in restoring clear title. A home buyer should find out what the policy offers, what it excludes, and whether the continuing coverage clause protects heirs or other future owners.

How Much Does an Owner’s Policy Cost a Home Buyer?

Some states like Florida, New Mexico, and Texas regulate title policies and pricing. In Iowa, a buyer can have a title searched and insured for a very small sum because Iowa provides the title protection.

In some states, the seller customarily covers the title insurance cost. Ask your agent who covers the premium.

Elsewhere, you may shop around for title coverage from a company licensed in the state. Let your real estate agent know early in your house-hunting if you plan to work with an insurer of your choosing. Otherwise, your agent or mortgage company will choose in advance. On closing day, it’ll be too late to specify your preference.  Your closing costs will pay for the title insurer’s work. The cost can be up to 1% of the home price.

You could go with the same insurer your lender uses. This is a common approach. Lenders offer discounted costs when they bundle the lender’s and owner’s policies.

And don’t overlook the possibility that your seller already holds an owner’s title policy. You might be able to substitute yourself as the beneficiary for a discounted premium.

Insurance policies contain deductibles, conditions, and exclusions. A buyer who has a survey done may increase their coverage and avoid some exceptions. The survey can uncover physical title issues impacting the owner’s use of the land as it’s described on the deed.

In a Nutshell…

You’ll get an opportunity to buy a title insurance policy for yourself when signing a mortgage or refi agreement. Getting an owner’s title policy is optional, but not very expensive, given the risk reduction it offers.

There’s a single payment upfront, and no premiums after that. The owner keeps the policy papers with other real estate documents, so it’s handy in case of unexpected issues.  

Policies vary by state and by company. So, to learn more, contact your local title insurer.