A common question for home buyers is, what is title insurance? And it often pops up just before the closing as a line item in your closing costs.
What Is Title Insurance?
Title Insurance is an indemnification policy that insures real property against defects in the title and invalid or unenforceable mortgages. The policy covers you for past issues that occurred prior to your ownership.
The company issuing the policy will pay to defend any lawsuits that may arise from title issues, reimburse any financial loss due to any title defects or pay to remove title defects that may inhibit a transfer of the property.
Title insurance is on of those things that you don’t know why you have it or if you should even pay for it, but you are certainly goging to be very happy you have it when you need it!
What Does Title Insurance Cover?
As pointed out, Title Insurance covers any title defects that happened prior to you purchasing a home or during your purchase. So what could be covered?
- Encroachments
- Disputes about the property ownership
- Liens resulting from unpaid contractor payments
- Liens from outstanding HOA fees or other debt
- The property being sold fraudulently
- Improper execution of documents
- Mistakes in recording the documents
- Unpaid taxes or liens
- Unreleased mortgages
- Purchaser not accepting title on your home based on the condition
Do I Need Title Insurance?
Yes!! You need to protect one of the largest investments you make by properly insuring the title. Title issues are expensive to defend and that is exactly what your insurance company does.
Lenders Title Insurance Policy vs. Owner Title Insurance Policy
When purchasing a property, two types of title insurance policies may be involved: a lender’s title insurance policy and an owner’s title insurance policy.
The lender’s policy protects the lender’s investment in the property, while the owner’s policy protects the homeowner’s investment.
The lender’s policy is usually required by the lender and is based on the loan amount. It protects the lender from any title-related issues that may arise after they lend on the home, such as liens, encumbrances, or defects in the title. The policy lasts until the loan is paid off.
Owner’s Policy Is Optional
On the other hand, the owner’s policy protects the homeowner’s investment in the property. It covers the owner for the same types of issues as the lender’s policy but is based on the purchase price of the property. The policy lasts as long as the owner or their heirs have an interest in the property.
While the lender’s policy is often a requirement, the owner’s policy is optional but highly recommended. It provides peace of mind to the homeowner and can help avoid costly surprises down the road.
Hopefully, you will never need your title insurance policy but when you need it your going to be happy you have it. Here are a few common scenarios I have run into and with a title insurance policy in place the problems can just be a hiccup.
Undischarged Mortgage
Undischarged mortgages are something we have seen quite a bit of with the refinance boom of the early 2000s. When a home is refinanced the old mortgage is supposed to be discharged but with the flurry of refinances many of these mortgages fell through the cracks.
The problem arises, when you go to sell your home and all of a sudden there is a lien on the property for the mortgage company that should have been discharged but has not been.
Without the title insurance policy, the property cannot pass to a new owner as it would become uninsurable to a new title insurance company. While a title insurance company protects the owner/lender from a past defect, they will not take on a title with a known defect.
If the seller of a home did not take out an owner’s policy
It would take weeks, months or much more in combination with thousands of dollars to finally get the mortgage discharged.
An undischarged mortgage is fairly simple until banks have gone out of business as well as an attorney who issued the policy.
If you had a title insurance policy the insurance company would indemnify any future claims against the title defect and work behind the scenes to remove the title defect, allowing you to close on time.
Improperly Recorded Foreclosure
Another issue that is more serious that I have run into is a foreclosure that was improperly done.
I had a seller who bought a property. When they went to sell the home, a title exam found a foreclosure that was improperly recorded. Again, this makes the property virtually unsalable as no lender will finance a property that cannot receive a new title insurance policy.
Since the homeowner did have title insurance, the title insurance company, indemnified the new title insurance company from the issue allowing the new homeowner to finance the home.
Meanwhile, after the transfer the title insurance company worked to track down the paperwork and make sure the foreclosure had been properly recorded.
In the end, everyone was happy. If the homeowner had not had a policy in place they would have been stuck with a home. And they could not sell until the title issue was resolved. At the time we were unsure if a title insurance policy was in place. We were told by an attorney it could run from $20,000 to $100,000 to resolve the issue.
How Do I Get Title Insurance?
When you close on a home, your closing attorney or title company will automatically include it as part of the closing. If you are getting a mortgage it will be required for you to have it in place. You will not have an option of whether you get the lender’s policy or not.
At that time they will ask if you want the optional owner’s policy as well. Don’t skip it!
If you are a cash buyer make sure you don’t skip the title search and the Owner’s Title Insurance Policy.
Title Insurance Companies Near Me
There are only a handful of Title Insurance Companies in the state of Massachusetts. When purchasing a home or refinancing your closing attorney or title company will have a relationship with one or more of the major title companies in the state.
- Old Republic Title
- First American Title
- Fidelity National Title
- Chicago Title
- Stewart Title
You will not have to set up your own Title Insurance. Your closing attorney will take care of that.
But if you can not find your title insurance policy, you may have to call each title company individually. Start with a google search “title companies near me” and see the results.
Keep Your Title Insurance Policy
Generally, you do not receive the actual policy at closing. It will be mailed to you within 4-8 weeks of closing.
This is a document you should keep on hand. Unfortunately, title issues seem to arise when you go to sell your property.
Many homeowners after many years of ownership don’t realize the actual policy makes it much easier to find the insurer as well as an actual policy number.
How Much Does Title Insurance Cost In Massachusetts
For homebuyers financing a home, you will be getting two policies. A lender’s policy and an owner’s policy.
A lender’s policy is calculated based on the loan amount. The owner’s policy is calculated based on the purchase price.
Usually, for the two policies it will run between $2.25 to $3.50 each, per thousand dollars, in either purchase price or amount borrowed. Work with your title company or closing attorney to get an exact number of what each policy will cost you.
Do I Have Have Purchase Title Insurance When I Refinance?
Your original owner’s policy stays with you as long as you own the house, even if you refi.
The lender’s policy does need to be repurchased if you refinance your home. The good news is if you go back to the same insurer there is a reduced reissue rate.
Summary
Title insurance is a critical part of homwownership. It will protect you from title defects prior to your ownership as well as during your ownership. Hopefully you will never have to use it. But you certainly will be happy if the situation arises where you can’t sell your home because of a title defect.
While I personally, would never skip getting an owners policy, it is a decision you need to make. Your closing attoreny will discuss with you the benefits of purchasing your optional owners policy.
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