Title insurance is one of those arcane parts of the homebuying experience that many people don’t pay much attention to — until they have to. So it seems reasonable to ask: Is it really necessary?
The short and simple answer is yes, absolutely.
In fact, unless you pay cash for your house, the lender that holds your mortgage will insist on title insurance as a condition of sale — a policy for you, and a second one to protect the lender itself. Even all-cash buyers are strongly encouraged to get title insurance to protect their investment.
Title insurance protects you against losses if the title to a property is not free and clear of defects such as liens, judgments, or bankruptcies that were unknown when the title policy was issued. Title companies say that they undertake “extraordinary work” to address title issues in more than one-third of all real estate transactions.Often that involves examining public records going back 50 years or more to look for past deeds, wills, trusts, divorce decrees, bankruptcy filings, court judgments, and tax records that may be outstanding.
First American Title Insurance Co. recently prepared a report listing more than 70 ways a homeowner could lose a property because of title defects. Here are some of the most common:
MECHANIC’S LIENS: These are liens placed against a property that a general contractor or someone who worked to improve the home filed before beginning the work. This is to ensure the contractor gets paid, and the lien is to be released when the job is complete. Problems can surface if the contractor doesn’t file a “satisfaction” of the lien and, thereby, the lien remains on the property title.
BANKRUPTCIES: This can cause a problem when, for example, a seller buys a home while single but then marries someone with a recent bankruptcy. The title company must ensure the new spouse has signed off on the deed and also that the bankruptcy case has been discharged. If not, the title company would need to petition the court to release the property from the bankruptcy process.
DIVORCES: This often causes issues when a divorced spouse doesn’t remember to remove a lien for child support, even though the debt may have been resolved long ago. Also, lien issues may arise from past-due spousal support or delinquent taxes.
Title insurance premiums are based on the amount of coverage provided — most significantly, the sale price of the home. Premiums are paid only once.
Whether the title premium is paid by the buyer or seller, or split between them, is not set by law; it is a matter of local custom. In Northern California the buyer customarily pays the premium for title insurance — but not in Santa Clara County, where the seller pays. Occasionally the premium is split between the buyer and the seller, while in Southern California the seller usually pays the premium.
In almost every county, the buyer pays the lender’s policy premium, although both sides are free to negotiate a different allocation of fees. Your real estate professional, or your title or escrow company, can help advise you on local practices.
The California Department of Insurance advises homebuyers and sellers to compare rates for title insurance. State law requires all title and escrow companies to file rate schedules, and competing title insurers may offer different costs or services. The person who pays for the policy selects the title insurance company.
(Photo: Flickr/Garrett Coakley)