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Title Insurance 101: a Guide for Realtors, Home Buyers, & Lenders

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Title Insurance 101: a Guide for Realtors, Home Buyers, & Lenders Title Insurance 101: A Guide for Realtors, Home Buyers, & Lenders TABLE OF CONTENTS • Introduction • The History Behind Title Insurance in the United States • Why Do You Need Title Insurance? • What Is Lender’s Title Insurance? • What Is Owner’s Title Insurance? • What Is a Title Commitment and Why Is It Important? • What Does a Title Insurance Underwriter Do? • How Much Does Title Insurance Cost? • What Are Title Policy Endorsements? • What Are Title Insurance Vesting Issues? • What Should You Look for in a Title Insurance Company? • What Should You Expect From the Title Policy Process? Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 INTRODUCTION One of the most important steps to take before closing the deal on the purchase of a new home is to obtain title insurance. But what is it? Why do you need it? And where can you get it? We created this eBook to answer those questions and many others and to help realtors, home buyers, and mortgage lenders better understand the ins and outs of title insurance. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 THE HISTORY BEHIND TITLE INSURANCE IN THE UNITED STATES In layperson’s terms, a title to a piece of property provides evidence of lawful ownership. And title insurance is a type of policy that insures a property owner or mortgage lender against loss by reason of defects in the title to a piece of real estate. But up until the 1870s in the United States, there was no title insurance. It was the home buyer’s full responsibility to determine if a title was valid. Proving so was an incredibly difficult and time-consuming endeavor, as it was difficult to obtain access to property records. The issue came to a head in 1868 when a Pennsylvania conveyancer (a lawyer who specializes in buying and selling property), Charles Muirhead, found the title on a piece of property that one of his clients, Mark Watson, was planning to purchase. Although there were liens on the property, Muirhead did not report them to Watson, and based on the supposedly clean title, Watson purchased the property. Upon finding out about the liens, Watson sued Muirhead to recover his losses, but the Pennsylvania Supreme Court ruled that there was no negligence on Muirhead’s part and Watson had absolutely no recourse. This put into motion an act by the Pennsylvania Legislature “to provide for the incorporation and regulation of title insurance companies.” As a result, the first title company in the United States was established in Philadelphia in 1876, and title insurance was born. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WHY DO YOU NEED TITLE INSURANCE? Watson v. Muirhead is a textbook case as to why every home buyer and lender needs to have title insurance. Even though it’s much easier to track down records these days, you absolutely want to be protected against property loss or damage that could be caused as the result of a lien, encumbrance, or defect in a title. • Lien—a public notice that money is owed on the home. • Encumbrance—a registered interest on the home from someone who is not the owner. • Defect—a serious error, omission, or other complication related to the ownership of the home. It’s important to note that each title insurance policy has its own terms, conditions, and exclusions. Unlike other insurance policies, such as car insurance, title insurance protects the home buyer and lender from past events (not future events), which are touched on above. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 In addition, the insurance premium is paid just once, at closing, when the real estate transaction has been finalized. The coverage is good for as long as the home buyer or their heirs have an interest in the home. When the home buyer signs the purchase agreement for the home, the escrow, or closing, agent (the individual who facilitates the transfer of the property) will find an appropriate title insurer. As mentioned, both the lender and home buyer need to have title insurance on the home. The seller typically pays for the title search (see below) and home buyer’s policy, while the home buyer typically pays for the lender’s policy; though it depends on location. For example, in 22 of Florida’s 67 counties, the home buyer pays for both policies. However, payment of title insurance is open for negotiation and is always part of closing costs on the home. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WHAT IS LENDER’S TITLE INSURANCE? Lender’s title insurance, also known as a mortgagee policy, covers the lender for the costs of its legal defense and protects the lender if there is a failure of title or if the status (priority) of their lien is different than expected. Lender’s title insurance protects the lender up to the amount of their mortgage. In addition, it protects the lender from title issues that may not have been found in the public records, such as documents executed via fraud or forgery. Typically, the home buyer can’t get a mortgage loan unless they purchase lender’s title insurance for the lender. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WHAT IS OWNER’S TITLE INSURANCE? Owner’s title insurance is typically issued on the purchase price of a property. It protects the owner from title defects that result when the ownership of the property is challenged. While the buyer may be forced to purchase a title insurance policy to protect their lender, their equity is NOT protected unless they purchase owner’s title insurance. Owner’s title insurance protects the costs to clear the title of the discovered defect(s) and protects any legal fees the owner may incur to protect their interests in the property. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WHAT IS A TITLE COMMITMENT AND WHY IS IT IMPORTANT? Once the parties agree to use a title insurance • divorce decrees company, that company will make a promise to • deeds issue title insurance for the home after closing. This • trusts promise is known as the title commitment, and it’s • wills composed of the same terms, conditions, and exclusions that will appear in the insurance policy. The report informs all parties involved of any possible issues, or clouds, before moving forward with the sale. As part of the title commitment, the home buyer receives a title binder of information on the home. When the home buyer has the title commitment in hand, it’s This is the information that the insurance critical for them or their attorney to review it so that they know underwriter (mentioned in the next section) collects about any exceptions found during the review of the public after conducting a title search to review the home’s records. For example, the home buyer may not want to public records. This information includes: purchase a home if an easement has been granted for a utility pole on the property they’re interested in buying. If this • past bankruptcy filings exception was listed on the home buyer’s title insurance policy • court judgments and the home buyer failed to see it, it’s not the title insurance • tax records, company’s responsibility to help them out. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 Now, there could be certain exceptions listed on the title commitment that won’t interfere with the home buyer’s use of the home. For example, a utility pole certainly might, but including an exception for the electric company to read your meter would not. In addition, if the home buyer has any plans to add to the house or build another structure on the property, they will want to know in advance whether that’s permitted. Finally, there may be an issue that was discovered during the survey of the property. For example, the need to remove a fence that was mistakenly built on your neighbor’s property. This would also be listed on the title commitment, and it’s the seller’s responsibility to have it moved or get an easement from the neighbor to keep it where it is. Regardless, if the home buyer does not see this in the title commitment, they will be responsible for addressing the fence issue. Fortunately, most real estate purchase agreements include a provision that states that the purchase of the home is subject to the home buyer’s review and acceptance of the title commitment. Consequently, if there are any unacceptable exceptions to the home buyer, they can request that the seller take care of them or the home buyer can walk away. For example, if there’s a lien on the home, the escrow company will clear it and deduct it from the net amount of the sale. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WHAT DOES A TITLE INSURANCE UNDERWRITER DO? As touched on in the previous section, an insurance underwriter is responsible for handling the title search, ensuring that the current owner has full ownership and rights to the home he/she is selling. A talented and dedicated insurance underwriter can make all the difference in determining whether a title is clean.
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