Updated April1 , 2011 12:01 a.m. ET
Q. I’m buying a home and the lender insists that I buy a title insurance policy before it will give me the loan. Now my real estate agent tells me that I should buy a policy for myself, too. This seems like overkill. The house I’m buying is only five years old, and the sellers are original owners. Is the agent right, and if so, why do I need this insurance?
A. Imagine that you’ve bought and settled in to this house. One day, a woman knocks on your door and says that she and her husband had split up shortly before he put the house on the market, and that he forged her name on the deed. She says the sale was invalid and that she’s still the owner-and she wants you out. You and the woman go to court where she proves that her story is true. She gets the house back, and you are evicted. Meanwhile, the husband has vanished with the money from the sale. Or imagine that you discover after closing that there are “clouds” against the title, like liens for unpaid contractor bills (called “mechanic’s liens”), legal judgments or taxes. Or perhaps you learn that a former owner has a life estate in the property.
Any of these situations could happen to the buyers of any house, even relatively new ones purchased from original owners. That’s why most lenders won’t fund a mortgage unless the buyer purchases a title insurance policy to protect it (but not you) from losses due to such claims. And that’s why I believe that you should have a separate policy, too.
During a title search, a professional examiner searches through public records, either in person or online, looking not just at the chain of ownership but also at other issues that might affect whether title can be cleanly delivered to a future owner, such as undisclosed leases or restrictive covenants that affect how a property can be used. In many cases, should a problem be found, the title company will quietly fix it. Once the title is clean or “marketable,” the underwriters will issue a policy that essentially says that it will defend the policyholder’s title in court should anyone challenge it.
The lender’s policy is attached to the mortgage, so should you refinance, you will have to purchase them another one. The owner’s policy is attached to the property, however, so you won’t have to buy another one as long as you own the home. Whether the seller or buyer pays for an owner’s policy is typically a matter of local custom, but it can be negotiated as part of the purchase. Since costs vary widely, it pays to shop around for the best rate.
To be sure, some people argue that because public records can be searched so easily by computer these days, title insurance is a rip-off. They maintain that because the incidence of claims is so low, the cost, which can top $1,ooo in some areas (paid in a onetime premium at closing), is unconscionable. Indeed, citing high costs, Iowa has created its own title guarantee program. Other states have launched investigations into title
insurance companies that give kickbacks or other inducements to agents who recommend them.
Despite these problems, I think an owner’s title insurance policy is a necessary evil. Sure, it’s not very likely that a wronged spouse or a long-lost heir is going to turn up at your doorstep, but if you are unlucky enough to find yourself in that situation, you will be very glad that you have that policy.
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