Takeaways:
- A lender’s title insurance policy is issued in the amount of the loan and assures the lender of the validity, priority and enforceability of its mortgage, and protects the lender’s security interest in the property. Liability decreases as the mortgage debt is reduced, and this policy does not protect homeowners.
- An owner’s title insurance policy is typically issued in the amount of the real estate purchase price and remains in effect for as long as the owner, or his or her heirs, retains an interest in the property. It identifies potential risks before a transaction is completed. In the event a claim is discovered, the owner’s policy will cover it, as well as court costs and related fees.
- Newly constructed homes may be built on land that is part of a larger parcel that has undiscovered claims.
- Consumers have the right to shop around for title insurance.
In our last story addressing an Inman reader’s question about the value of title insurance, “Why it’s impossible for a title insurance premium to increase,” we discussed how title insurance is a one-time fee that a borrower pays to ensure that his property is free of liens, encumbrances and other claims.
But what if a buyer is purchasing a newly constructed home that presumably starts out with none of these issues?
Recently, another reader, a buyer from Michigan, posed this question:
I am purchasing a brand-new house that is set to close on July 2. In my Good Faith Estimate, the owner’s title insurance policy is quoted at $1,500.
My concern is that I feel the likelihood of a contractor putting a lien on my home is highly unlikely. I have talked to many of them over the past few months, and all seemed well. Considering this is a brand-new house in a steadily moving development, and this is the builder’s eighth major project, would you buy the insurance or not?
Before we answer this question, this is a good opportunity to review the difference in the two types of title insurance policies: a lender’s title insurance policy and an owner’s title insurance policy.
A lender’s policy assures the lender of the validity, priority and enforceability of its mortgage and protects the lender’s security interest in the property. A lender’s policy is issued in the amount of the loan, and liability decreases as the mortgage debt is reduced.
In a typical residential transaction, the title insurance policy often required by the mortgage lender will not safeguard the rights and interests of the homebuyer. Therefore, a separate owner’s policy is necessary.
It is typically issued in the amount of the real estate purchase price, and remains in effect for as long as the owner, or his or her heirs, retains an interest in the property. This policy identifies potential risks before a transaction is completed. In the event a claim is discovered, the owner’s policy will cover it, as well as all defense costs, including court costs and related fees, against attacks on the title.
As the saying goes, “All real estate is local,” and who actually pays for title insurance can vary from state to state, or even region to region within a state. In some parts of the country, the seller purchases the owner’s policy for the buyer, in effect telling them the title is clear.
In other parts of the country, however, the lender’s and owner’s policies are issued simultaneously, and in still others, the buyer must request the owner’s policy and pay separately for it.
To address this reader’s question, I turned to Charles Cain, executive vice president of WFG National Title Insurance Co.’s agency operations, who manages the company’s operations in Michigan.
Cain first explained that in Michigan, sellers usually pay for the owner’s policy. In this case, the seller is actually the builder, so it may be that this reader’s contract puts the responsibility for the policy on him.
Without having seen the buyer’s contract or invoice, Cain pointed out that the owner’s policy amount “may include the loan policy amount, with the new buyer paying only a simultaneous insurance fee of $100 or less for the loan policy. So it may not be $1,500 of additional expense.”
Turning to the issue of whether purchasing an owner’s policy on a new home built from scratch is worth the expense, Cain first noted that eight projects aren’t necessarily indicative of a builder’s successful track record.
“Builders of 30 years’ standing have had financial issues in the past,” he said.
In the case of a new build, it may seem that mechanic’s liens are a remote possibility, but that’s not all a title policy covers, Cain said.
“Title insurance also covers mistakes made in the recorders and registrars of deeds’ offices,” he said. “So if a lien is properly filed but it cannot be found in a search due to a courthouse error, then the lien holder still can assert their rights, and the homeowner is left to sue the county. Not a good solution.”
Any newly constructed home will be built on land that has been around for a long time. It may have been part of a larger parcel that has undiscovered claims.
In addition, unpaid mechanic’s liens — bills from providers like roofers, carpenters, plumbers, etc. — actually attach to the real estate, so if the builder does not pay them — or, worse yet, goes out of business at some point — contractors can file a lien on your property.
All of this can happen right under a buyer’s nose, without his knowledge, and present unwelcome surprises down the road. No matter how nice and professional your contractors may seem, these things happen. It’s why title insurance was created in the first place.
And one last point: Regarding the reader’s concern about the cost of his policy, it’s important to remember that consumers have the right to shop around for title insurance. Even if your builder has an in-house or affiliated title company, the Real Estate Settlement Procedures Act (RESPA) protects your right to shop around for a different title insurance provider and make your own judgment based on cost and service.
Your home may be the most important purchase you ever make, so be sure to carefully consider all of these factors in order to make the best decision for you and for your family. Thanks for your question, and keep them coming!
