Ask Our Broker With Peter G. Miller: Title Insured?
Q: We’ve purchased a number of homes and are curious about title insurance. We know lenders require title insurance, but since we’re now able to buy for cash, why do we need such coverage?
A: When a home is financed, the lender wants to be certain the seller actually owns the property. The lender will order a title search to show there is a chain of title which leads to the current owner. If the title search is good, the title insurance company will then insure the title. (Title insurance is sold in all states except Iowa, which operates its own program.)
But if the title search finds no problems, then why do we need title insurance? Because public records can be wrong, or title searches might be faulty. These seem like rare events, but if it happens to you, then your home — and a lot of money — might be at stake.
What can go wrong? A mortgage payoff may not be recorded. A lien might still be outstanding. There can be issues with wills and heirs. There can be forgeries. A past owner may have lacked the capacity to sign a deed, such as an individual with mental health problems. And the people involved in these issues, who might be able to answer your questions, may be dead.
You can purchase two forms of title insurance.
With lender’s coverage, the policy protects you up to the value of the mortgage, meaning that the lender will be paid off in the event of title problems. What isn’t protected is your equity such as the down payment or loan amortization. With owner’s coverage, equity is protected.
In your situation, there is no lender because you’re a cash buyer. You don’t have to buy title insurance, but you can have title defects whether or not you finance with a mortgage. Without title insurance, are you willing to pay the bills in the event of a claim? Title insurance is a one-time cost, and something you’ll appreciate if a title claim ever arises.
What about pricing? It depends on:
• Where the property is located.
• The purchase price.
• Whether you’re buying a lender’s policy or an owner’s policy.
• Whether you can get a re-issue rate, a discount if a recent policy has been issued.
Rather than shop for title insurance, a better approach is to search for closing services. Settlement fees can vary substantially, so ask around for the best package price — and be sure it includes title insurance.
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to email@example.com.
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