People have a chance to buy title insurance when they buy homes. Homeowners might give these policies little thought until they need them. And yet, lenders focus pointedly on the matter. Get a mortgage, and you get a lender’s title insurance policy. Some people assume the lender’s coverage is enough. As we’ll explain here, it’s probably not.
But there’s a further question. If an owner’s title policy is so important to add, what level of coverage should the buyer consider? Is extended coverage better than the standard policy?
We’ll go through these questions in order.
If a Buyer Has Already Paid for Lender’s Title Insurance, Why Buy an Owner’s Policy Too?
When you buy a home, you (or the seller, depending on local custom) will buy title insurance at the settlement table — to benefit the lender. You can also buy an optional owner’s title policy. You have one chance to buy the owner’s policy — at settlement. You pay for it once. There are no monthly premiums. It covers the title as long as you own the home, and even if you put the property into a living trust.
In fact, your owner’s title policy even outlives you to protects your heirs’ interest in the property. Later, when you sell your home, giving a warranty deed to your buyer, your coverage backs up the warranty you made. All for a few hundred dollars. Purchase it at settlement along with the lender’s policy, and you may receive a multiple plan discount.
The lender’s title insurance only covers the mortgage balance due. It does not protect your equity in the home. The lender wants the title company to have its back if someone shows up and claims an interest in a house that secures a loan. The lender also wants the title company to protect its priority, so other liens can’t take precedence. As you pay your mortgage down, the amount of lender’s coverage remaining on the property shrinks. When you pay off the mortgage, the coverage vanishes.
But with an owner’s policy, if a claim related to the actions of a prior owner takes you by surprise, you are a named beneficiary, entitled to support for legal costs to resolve the conflict.
What Kind of Issues Can an Owner’s Title Policy Solve?
As a buyer, you expect full rights to your new property, just as the deed indicates, without any surprises down the road. You rely on a title company to vet the title to the home. A title search looks at court documents, bankruptcies, deaths and divorces, to confirm that the seller has full rights in the home and can transfer those rights to you. The title search also checks for secured debts that should be paid off before the sale can happen.
If the title report shows that the seller is offering the home with a clear title, that’s great. Yet although the title search goes back in the chain of title several decades, not every issue is on the record, and title companies occasionally do miss recorded items.
An owner’s policy addresses past problems that become obvious after purchase, such as a faulty property description, a lack of access rights, forged or otherwise improperly produced documents, missing heirs or co-owners, or undisclosed but recorded liens for unpaid local services. An owner’s title policy would reimburse you for your expenses for issues like these, and work to clear your title if necessary. Check the policy you’re buying to know what protections are standard.
Pro tip: You can get an add-on to cover the gap in time between the title search and the transfer of the deed from the seller to you. During that time, a lien for the seller’s unpaid bills could attach to the house — and stay on the house after the deed changes hands. Title insurance can take care of this mess for a new owner with the right insurance coverage.
What Do Extended Owner’s Policies Cover That Standard Owner’s Policies Don’t?
An extended (sometimes called enhanced) owner’s title policy covers more items, such as clouds on titles connected to decades-old foreclosures, certain zoning and property restriction problems, a prior owner’s failure to pull required work permits, unrecorded easement claims, survey mistakes, structures encroaching on adjacent property, unrecorded mechanic’s liens, and a host of other issues.
Perhaps the most significant of those issues is fraud.
An extended title policy shields your equity from identity theft, post-policy forgery, and scams. The enhanced American Land Title Association Homeowner’s Policy, for about a 25% markup, guards against impersonation schemes through which a fraudster takes money by applying for a home equity line of credit on your home. You, the innocent homeowner, would be expected to pay off that debt, or undertake a very costly quiet title action. Because a home equity line of credit doesn’t get the vetting a mortgage gets, it’s a top pick for scam artists.
☛ Review your credit reports regularly to be sure there are no unexplained financial activities appearing under your name. And find out more about deed fraud and avoiding real estate scams.
Here is a comparison, published by Federal Title, of the company’s standard and enhanced title policy coverage. There could be a third tier available in your location — such as First American’s “Eagle Policy.” Extra coverage is often geared to unusual situations such as forced removal of improvements due to lack of building permits, encroachments since the property was purchased, and other matters. And you’ll be covered for losses and legal costs on account of boundary conflicts or structures overlapping adjacent properties that were not obvious before closing.
Expect certain deductibles, conditions and exceptions with any level of coverage. Have a survey done to avoid some of these exceptions. The survey is an important element in finding physical title issues that affect an owner’s use of a property as it’s described on the deed.
Not all land use problems can be remedied. A good example of this is the sea level rise and changes in tidal rivers that change land boundaries. That said, flood insurance is available and required in some areas.
☛ Lenders may require flood insurance to finance homes they deem susceptible to flooding. Learn more about flood insurance here.
Your real estate agent or mortgage representative will select a title company that’s familiar to them. It’s perfectly sensible to ask whether that particular company offers you the best selection and rates available.
As a buyer, can you select a title insurance company yourself? If you’re the one paying for it, certainly. Although companies’ standard policies are similar, given their affiliations with the American Land Title Association or the state’s equivalent, prices do vary. Tell your agent or mortgage specialist in advance that you plan to pick your policy.
Know who the policy underwriters are, look at their websites, and speak with representatives of the insurance companies for details. Examine the various items policies cover when considering what you might need.
Does your seller have an existing owner’s policy? If so, you might be able to get a substitution rate on your new title policy. And whenever you refinance your home, you buy a lender’s policy to cover the value of the loan. You might be eligible for a reissue discount then, too.
Now, what if you opted out or didn’t think to buy an owner’s policy? Are you on your own if a claim against your title comes up? Not necessarily. If you hold a warranty deed from the person who sold you the home, the seller’s title company should be prepared to help you. The title company’s attorneys perform title searches so as to give assurances, through a warranty deed, that your title is free and clear.
We sign off with a word of congratulations to you, the home buyer. Finding the right home to call your own can bring unparalleled satisfaction and joy. After considering the title policy offerings available, you may find your joy enhanced with a little extra insurance coverage.
Michele Lerner: With Identity Theft Threats, Enhanced Title Insurance May Protect You From Losing Your Home to a Scam, Washington Post (Nov. 18, 2020).
Entitle Direct Insurance: The Smart Consumer’s Guide to Reducing Closing Costs (PDF posted by the National Association of Insurance Commissioners, 2013).
Photo credit: Sieuwert Otterloo, via Unsplash.