[Note: Rich Feasel is a local expert on the topic of Title Insurance, so today we asked him to help de-mystify one of the complex topics in our industry: title insurance policies, why you need them, how they work, and more. We hope you find it helpful! -Stauffer & Sons]
Q: What is title insurance, exactly, and why do people need it?
A: Here’s a good technical definition: “Title insurance is a contract of indemnity that guarantees the condition of real property.” Put simply, when you get a title insurance policy on a home, the title company is guaranteeing that the property being sold has a clear title and has no liens against it. When you order a title insurance policy, we will do a search to see if there are any liens against the property, and then put together a “title commitment” that lays out any of the requirements that need to be met prior to closing, and then we issue the title policy.
This footwork before the policy is issued is important because sometimes properties have existing liens on them. One example is where a homeowner lives in a neighborhood with a home owner’s association but doesn’t pay the HOA dues; the HOA can put an assessment lien on the property. Also, in the new home construction world, builders can put a mechanic’s lien or materialman’s lien on the property if they did the work but didn’t get paid. So if we see a lien or a previous deed of trust on an existing home, we make note of this so these can be satisfied before the policy is issued.
Here’s a common example: there are a lot of “John Smiths” in the world, so if your name is John Smith and you live in Colorado Springs, there might be six other John Smiths in Colorado Springs who have a lien or judgment against their property. So first of all, we we need to make sure this is actually “our” John Smith, and, if not, clear up the error, but if it is, we need to get satisfaction on the judgment or lien before we can take the next step towards closing on the sale.
Here’s why people should get title insurance: let’s say, back in the “chain of title,” that someone with ownership interest didn’t get paid correctly during the sale of a home many years ago. Let’s say “Buyer A” first sells a home to “Buyer B,” who then sells it to “Buyer C,” who sells it to five different people who each have a 1/5th ownership stake. If one of those interested parties didn’t get conveyed correctly during the sale, that party can then say “I still own 1/5th of this property,” and you’ll have nothing to stand on legally to say he doesn’t. That’s what title insurance is for.
Q: How much does title insurance cost, and how it the price calculated?
A: Pricing for a title insurance policy is tiered based on the cost of the property. So, for example, if your home costs $250,000, your title policy might cost something like $1,000, and if your home costs over $500,000, your policy might cost something like $2,500. But those are just general numbers; you can actually find our pricing online using our pricing calculator. There are also things like re-issue rates, and bundled rates, depending on whether you’ve had a title policy issued in the past five years, or if you’re buying multiple properties at the same time, so there are discounts and other rates available for builders and developers, and more. Title policies are part of closing costs, and show up as a line item in a HUD 1 settlement statement.
Q: Who pays for a title policy and who actually owns it?
A: When you buy real estate with a lender, there are two policies issued simultaneously: a buyer’s policy and a lender’s policy. Typically, the buyer has to pay for the lender’s policy since the buyer is the one who is taking out the loan and is the one who “hired” the lender. So the buyer pays for the Mortgage Title Policy (sometimes called the “MTP”). Typically, the seller will pay for the buyer’s policy, unless the sales contract states that the buyer will pay for it. Sometimes a contract will state this as a condition of the sale, so we will just look at what the contract says and that gives us our instructions on how to close. So if the contract says “buyer to pay for title insurance,” that’s what we’ll do.
Q: Are there different kinds of title insurance, or different types of policies?
A: Aside from the fact that there’s a lender’s policy and buyer’s policy, no. They both cover the exact same thing for each respective policy holder. Although part of what a lender’s policy does is put the lender in the first position in case of judgements, unless a buyer is paying cash, in which case no lender policy is needed.
Q: Is a title policy similar to any other insurance policy, such as homeowner’s insurance?
A: Sort of. With homeowner’s insurance, you pay your mortgage each month, and it goes into an escrow account, from which your hazard insurance and taxes are paid and things like that, so you’re paying your insurance premium every month that way. Title insurance is different in that you only pay a one-time premium, and it lasts in perpetuity.
Q: How is “my property” defined in the policy? Does it just cover the house itself?
A: One common misconception people have about what we do is that they think we insure their property as defined by their street address, which we don’t. We insure the legal description of your property. Sometimes this can be very long and descriptive, for instance “unit 2, phase 3 of condominium subdivision X including garage unit A,” so the legal description can literally tell you exactly what is being transferred over in a sale. If you’re having a home built on a street corner, for example, and your house is “123 Main Avenue,” it might be that the house across the street is “123 Main Parkway,” and there wouldn’t be a good way for us to keep them straight, so we look at parcel numbers and the plat map to define the property (or if it hasn’t been platted yet, we’ll look at the “metes and bounds” description). So we use whatever is legally defined as your property in these documents.
Q: Is title insurance transferable? Will it cover my children if I give them my house down the road?
A: Yes, it’s transferable, but it all depends on how you hand over your house to family members. Depending on how you pass down your property to other family members, your policy can also cover “the estate of the deceased” after you pass away as well. You’ll need to check with an attorney to be completely certain.
Q: How often do you see claims against a title policy?
A: It happens, but it’s rare. A majority of the claims I see are from previous liens not being released correctly. Example: let’s say there’s a deed of trust on a property, and it’s sold. When it closes, there’s a new deed of trust put on it. The title company pays off the previous deed of trust, and it shows on the HUD form, and says “this deed of trust was paid off,” and the money was sent to the lender, but for whatever reason, the lender never sent the money to the trustee. So I’d say about 40% of all claims are previous liens that were released incorrectly.
Q: Should I get title insurance if I’m paying cash for my home or buying it from a friend or family member?
A: You don’t have to buy a title policy, but it’s still a pretty darn good idea, even if you’re paying cash or buying a home from a friend. It’s a very small fee compared to the total cost of the home and it says that the title company did their due diligence, and it’s a way of insuring the past. It is optional, but I think it’s a good idea.
Q: Who gets to pick the title company when I buy a home?
A: The party that is paying for the product is authorized to select the title insurance company. So if the buyer’s paying, the buyer can choose, and if the seller’s paying, the seller can choose.
Q: There are lots of title companies out there—is there a difference in their policy offerings?
A: As long as the forms used in the policy are sanctioned by the American Land Title Association (ALTA), then the coverage should be close to identical, depending on the amount of risk the insurance company was willing to accept. Basically, all the underwriters are members of ALTA and all the forms are created by ALTA, so it should all be the same. The differences between title companies is usually not price or coverage; it’s in service.
We hope you’ve found Rich’s post to be helpful. If you have any further questions about title insurance, feel free to contact him at the number or email below. And if you’re in the market to build a new home, we would love to talk to you. Just contact us and we will get touch. Thanks for reading!