Title Insurance

Lenders will mandate that a title insurance policy is purchased on all refinance and purchase transaction.  Title insurance is required by law and was enacted to protect both, the lender and the homeowner from financial loss, due to title-related issues.  The main purpose for having title insurance is to ensure that the title on the home is free and clear of any other liens that might jeopardize the lien position of your new 1^st or 2^nd mortgage providers.

At closing you should notice that the title insurance policy is separated into two components on your settlement statement: an owner’s policy and a lender’s policy.  The owner’s policy offers lien protection to the purchaser of the home, and will protect the new home owner from title-related issues up to the purchase price of the home.  On the other hand the lender’s policy will act as a separate policy exclusive to the lender, and will protect the lender up to the actual value of the lien being placed on the home.  The lender’s title insurance coverage will also have transferred assignment rights, which will cover any lender currently holding the mortgage; regardless of how many times the mortgage has been transferred.

Best way to illustrate title insurance is to run through an example of where it might apply.  Imagine you have been looking at homes with your realtor and during your search you come across a house that you simply love. This house is listed at $350,000 and it is, in your mind, everything you want in a home.  What stands out most to you is the phenomenal amount of detail in the landscaping.  This is the home of your dreams. You quickly make an offer on the home and complete the real estate transaction.  

A couple of months later you receive a bill for $60,000.00 from JP Smith’s custom landscaping company.  You think to yourself, “this has to be a mistake”; and though you are concerned, you decide to throw the invoice away.  A few weeks later you get a second notice, demanding the same amount be paid.  However, this time the notice states that legal action will be taken against you and they have initiated a lien on your home.  You think to yourself, “what the heck is going on?!”

As it turns out, four weeks before you bought the home, the owners at that time hired JP Smith to complete a major landscaping project on the home for them.  Once the project was complete the homeowners agreed to make payments to JP Smith in return for the work done, however, shortly after you bought the home, the old home owners stopped paying JP Smith for the services rendered.  Because the work was done on your property, the construction company has a right to put a lien on your home until the matter is resolved.  This is where your Title insurance policy will come into play.

For the most part, title insurance policies never have to be used; but when they are needed, can be a real asset to you.  Over the years I have only come across two incidents where title insurance was needed: one incident was the above mentioned landscaping example; the other incident consisted of a release of lien issue, created by a bank that sold the note to another bank but failed to release the lien on the property.

Because title insurance is required by law the only thing you can really control is who offers the insurance to you.  Most people will shop around for their car insurance and their home owners insurance, but will use whoever they are told to use for their title insurance.  This is especially true in real estate purchase transactions.  In a real estate transaction it has become an unwritten law that the selling agent has the right to choose which title company the buyers will use for their title related needs.  What you should know is that you as a buyer should choose the title company you want to use.  Keep in mind that fees from one Title Company to another can be 50 to 100% higher depending on which company you choose.  So before you are told who you have to use for your title insurance, do some checking around you might be able to save yourself hundreds of dollars by making the right decision up front.