“Do I really need title insurance?” is a common question from those trying to maximize return on a real estate investment.
The short answer is you might not have a choice. If you have a lender for your real estate purchase or refinance, then, 99% of the time, your lender will not fund a mortgage loan without title insurance. If you don’t have a lender, title insurance will prevent some lien or title defect prior to your period of ownership from potentially ruining your real estate investment.
OK. How About the Long Lawyer Answer?
Title insurance is a form of indemnity insurance that insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. It can protect a buyer of property from unforeseen or unknown events or circumstances that can adversely affect title or beneficial use and enjoyment of the purchased property. Unlike most insurance, title insurance protects against what happened in the past, not what happens in the future.
Standard title policies cover a variety of claims, including fraudulent deeds, undisclosed recorded mortgage/mechanic’s liens, undisclosed recorded easements/restrictions, lack of legal access, and improper legal descriptions. A claim against the title policy, however, will not be covered if it is identified as an exception in the title insurance policy (typically found in schedule B of the title commitment/policy) or if the issue or defect is known or created by the buyer/lender. Nonetheless, if something appears as an exception, the title company may be able to do one of two things. First, the company may issue a title endorsement at an additional cost to cover this specific risk. Second, it could give affirmative coverage over the title issue or defect, which means deleting the title defect as an exception to the title policy, meaning that it would be covered.
If you have a lender, as most transactions do, the lender will require a lender’s title policy. This ensures that the lender’s lien is the “first in line” for payment and that the lender can obtain title should the borrower fail to pay in accordance with the loan agreement. Federal loan requirements for Fannie Mae and Freddie Mac also mandate that a lender obtain title insurance.
What Is Not Covered?
- As said above, any title defect you knew about.
- Zoning and other governmental requirements. If your municipality now mandates design, say, with gold-plated facades, the remedy is a call to your councilperson, not a title claim.
- Anything after the date of the Title Policy. This is probably the biggest difference from regular casualty and liability insurance that most people are more familiar with
In most states, once you have paid for a lender’s title policy, the cost of an owner’s title policy is nominal (lawyer speak for “pretty cheap”). It is usually worthwhile to obtain both.
What About If No Lender Is Involved?
Call your lawyer and discuss the situation. Chances are that you will still want to buy an owner’s title policy for “marketability” purposes (lawyer speak for “if you ever want to sell this property to someone else or get someone to lend money using the property as collateral”).
What About If You Buy Cash and Won’t Have a Lender until Later?
Ask the title company how long it can “hold it open” to issue another title policy. It may vary according to jurisdiction or underwriter. The idea is that the title company just issued a policy, so it should not be difficult to issue another policy.
Who Pays? Who Chooses the Title Company?
These questions are asked together because, generally, the party that pays the title insurance premium chooses the title company. Different states have different customs for who pays. In Pennsylvania, New Jersey, and New York, the buyer generally pays and therefore chooses the title company. In Texas, the seller generally pays and chooses the title company.
What is a Bringdown?
This is title-insurance speak for “searching the property again since the date of the last search.” Another term is “Date Down.”
What is the “Gap”? What Does “Insuring the Gap” Mean?
This is title-insurance speak for “the period between the title commitment date and the actual date of the policy.” If the title commitment was valid as of Monday but Closing is on Wednesday, there is always a chance that something happened Monday evening or on Tuesday. Many title insurance commitments state that this period is not covered. Some jurisdictions allow an additional endorsement to protect this.
What Is the Difference Between a Title Search, Commitment, Pro Forma, and Policy?
- A Title Search (or a Record Owner and Lien Search) merely shows what has been uncovered by a search of records.
- The Commitment is the Title Search plus additional requirements that must be met in order for the policy to be issued.
- The Pro Forma is what the Policy will look like, including all endorsements. The Pro Forma is not signed and has blanks for documents that are not yet recorded. Therefore, the Pro Forma is not an official Policy. Further, not all closings result in the Title Company issuing a Pro Forma prior to closing.
- The Policy is what you paid for. It should be signed by a title officer and reviewed for any typographical errors.
What is the Policy Jacket?
This is the boilerplate language describing the nature of the Title Policy and process for making a claim. It is generally not negotiable.