What is title insurance and why do we need it?
Question of the week: What is title insurance and why do we need it?
Over the past few weeks I have had several questions regarding the various insurances involved in a real estate transaction. I have decided the best way to address the questions for the next several weeks to have a series on insurance in the Weekly Rate and Market Update, this series will cover home warranty, homeowners’, title, mortgage, and finally mortgage life/disability insurances.
Answer: Title insurance is the least understood insurance products homeowners pay for as part of a real estate transaction.
In very simple terms title insurance protects your ownership. In a real estate transfer transaction, the title insurance policy will ensure, and insure, that when the transfer occurs you will have “clear” title. In a transaction where a new mortgage is being filed as a lien against the property a title policy will cover that the liens known at the time of closing are the only liens against the property.
Let’s dig a little deeper. Using a sale transaction in which the buyer is obtaining a mortgage will give us a chance to look at the two title policy premiums paid in the transaction.
The two title policies issued in a typical real estate sale transaction are a ALTA (American Land Title Association) policy and a lender’s title insurance policy. Of the two the ALTA policy is more expensive and is paid by the seller, the lender’s policy is lower cost and is paid by the buyer. It should be noted, that title premiums are paid one time, at closing, and are not recurring like your auto or homeowner’s insurance premiums.
Side note, when refinancing your new lender will require a lender’s policy, which is generally at a reduced rate as you have previously paid for a lender’s policy on the mortgage being refinanced.
The ALTA policy covers the title. During the escrow period the title company is researching the history of ownership for the property and when it issues its policy it is protecting the new owner against any claims against the title. The title company is claiming that the title is “clear” or “unclouded,” and that you own the property. If the property had gone through probate in the past, or previous owners had divorced, perhaps the property had been created through the result of dividing a larger parcel of land, the ALTA policy protects your title against any claims from prior heirs, spouses or developers who file a claim because an attorney or a clerk made errors in the transfer. If there is a claim, the title company will cover legal bills and any costs to cure to ensure you retain title.
The ALTA policy also protects your title as to the stated boundaries, who has access and other matters that may impact your enjoyment of the property. When you are purchasing a property, you will receive a preliminary title report that will list all the current liens against the property, such as the current mortgage(s), taxes, if there are any mechanics liens or claims by tax authorities beyond the standard property taxes payable to the county. It will also provide the legal description of the property, which will determine the lot lines that define the land you will own. Easements will be listed as well. An easement is permission that is granted to others to access the property, for instance an easement for power lines, or an easement for a neighbor to have access to five feet along the eastern border of the property for a driveway to their home, and parcel, located behind your home from the road. In many Southern California cities, there are easements for the city for the alley that runs behind your home.
When you move into your new home and discover that the fence between you lot and your neighbor’s is four feet on your lot you can contact your title company and tell them the issue. They will then initiate an investigation and if there is any cost to cure, including legal fees, the title company will cover the costs.
If you are the buyer the lender’s policy you pay for protects your property from any undisclosed liens. The lender desires this policy so its claim to title in the event of foreclosure is not subordinated to another claim. Suppose the current owner of the property went through a remodel or renovation. Early in the project there was a dispute with a contractor not doing the work properly, or abandoning the project. The homeowner fired the contractor and engaged a new contractor who completed the job. Three years later as the property is in escrow the original contractor files a mechanic’s lien for money he feels is owed for the work he put into the property. The lien is filed and not caught by the title company before closing.
A few years after closing you decide to get an equity line of credit using your home as collateral. The title company, that you obtained a policy from when purchasing the home, is notified of this mechanic’s lien. They investigate and determine the claim is not valid, but re-issue a new policy for you to complete your equity line transaction and they deal with the contractor and the mechanic’s lien issue.
Title policies are not just for when purchasing or refinancing a home. Many attorneys recommend that ALTA policies are obtained when property transfers through probate, a transfer through a trust or inheritance, or divorce.
Having a title claim is extremely rare, so rare that in over thirty years in the industry I can recall only four such instances. That said, when there is a title claim it is very expensive to resolve the issue and it can take a very long time—which ties up the ability to engage in any transaction with the property until the issue is resolved. Because of this cost to cure title issues, the premiums paid for policies when purchasing or refinancing are worth the cost…just in case.
Next week we will discuss mortgage insurance and what it covers.
Links for prior posts in our insurance series:
Have a question? Ask me!
Looking for good and bad in the September employment report released this morning by the Department of Labor we find a bit of both. The economy added 136,000 jobs for the month, and hiring numbers for July and August were increased by 45,000 jobs. The headline unemployment rate dropped to 3.5%, the lowest since December 1969. Those are positives. Less than positive is that hourly wages did not increase in the month and shrank in overall growth on an annual basis from 3.2% to 2.9% growth. As well, manufacturing and retail sectors saw a net loss in jobs. Overall the news is news is negative for lower mortgage rates as it takes off the table a Fed drop in rates this month and shows a the labor market is still growing and employing more Americans.
Rates for Friday Ocotber 4, 2019: The mortgage markets have slowly been clawing back from the spike in early-September. While rates have been pretty flat since the spike, prices of Mortgage Backed Securities (MBS, which determine rates) have been slowly climbing—putting downward pressure on rates. When this market movement occurs lenders are very slow to lower their rates until they see a trend, which is what has happened this week. Lenders have pushed rates down a tad, our first weekly drop since August. Is this a new trend or a one-off this week? We won’t know for several weeks.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.50% Down 0.125%
30 year high-balance conforming 3.875% Down 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Frequent readers know that earlier this month Leslie and I celebrated our 25th anniversary and a few weeks ago our daughter’s 20th birthday. This past Sunday, September 29th, Stratis Financial also turned twenty! It does not seem that long, but then we start working with our clients’ children, in some cases grandchildren, and it twenty years makes more sense.
We have been so fortunate to have so many wonderful referral partners who have entrusted us with their clients’ business, and of course thousands of families who let us help them purchase or refinance—or both—their homes and investment properties. At the heart of it all is the wonderful people who work so very hard, and smart, to ensure our clients receive the best in service and care.
Thank you to everyone who has supported Stratis Financial with your referrals and business for the past twenty years!
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
