Imagine buying your dream home. A few months after escrow closes you’re finally all moved in and enjoying your new house. Everything seems to be going well until you get a letter in the mail from the local city government. Apparently, the previous owner of the house didn’t pay property taxes for the past 10 years. Due to the fact that you’re the title and registered owner of the house, you now owe the city $25,000. Oh by the way….if it’s not paid by next week, the city is going to legally seize the house from you. A nightmare scenario like this used to be pretty common back in the 1800’s. Thankfully title insurance came into existence and situations like this very rarely occur anymore.
What it title insurance?
It is an insurance policy that will cover your legal expenses and make you whole again if there is some issue with the property after escrow has closed. E.g. The previous owner sold the house without the permission of his ex-wife (who is co-owner), some contractor has a lien on the house due to unpaid work, or the local power company decides to take advantage of an easement going through your backyard. The situations that could lead to an issue with the title of your new home are endless. This is why title insurance was created.
Here are 5 things you should know about title insurance:
1. Coverage needed
For the average home buyer with no special circumstances, you’re only going to need “standard coverage”. Title insurance is one-time payment that will cover you as long as you or your heirs own the house. The money you pay out to the insurance company goes towards paying the salary of the person who uses a computer or other documents to ascertain if there are any liens against the property or other issues that could prevent you from becoming full legal owner of the house with no outstanding issues.
2. Who Pays, the buyer or the seller?
How good are you or your realtors negotiating skills? It’s a toss-up as to who pays for the title insurance. Sometimes the buyer pays, sometimes the seller pays. This is usually hammered out in the negotiations phase of buying a house.
3. How do I know the insurance company will be around for a long while?
Technically speaking, you don’t. And you won’t. Companies go under all the time. However, there is one thing you can do to be a bit more proactive: check the financial solvency of the underwriter who is issuing the insurance policy. That’s usually a big clue as to whether or not you should purchase your title insurance from them.
Demotech Inc. or A.M. Best Co. are just two of many ratings companies out there who can give you a head’s up as to whether the underwriter is about to go underwater.
4. Whose recommendation should you trust?
When buying a home, everyone seems to be giving you advice all at once. The real estate agent, the seller, the mortgage lender, your uncle Bob, your friends on Facebook.
Who do you trust for a recommendation for which title insurance company to go with? The mortgage lender. They are the party who is risking the most (aside from you) by putting their money down to buy your house. If your mortgage lender has a recommendation for a title insurance company, it’s probably a good idea to listen to them.
5. Why is an “owner’s policy” a good idea?
As unfair as this may seem…your title insurance only covers the amount of the lender’s loan. Generally speaking, this is not for the full property value. So by purchasing what’s referred to as a “owner’s policy” you (personally) are now covered for the whole kit and caboodle. It’s only a small additional expense and it is highly recommended that everyone get it.