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Title Insurance? What The Heck Is It?

Title Policy

I’ve help a lot of buyers find their dream homes.  I’ve witnessed so many signing appointments (where buyers sign their final loan documents) and seen so many HUD statements that I could explain them in my sleep.  One section on the HUD that most buyers have questions about is the title section (1100).  The most frequently asked question is: What Is It?

Title Insurance Defined:

In a nutshell, title insurance is insurance that protects you from financial loss arising from title problems on your property. Title is defined as: A right or claim to the legal ownership of real property (as opposed to personal property).  It is a policy issued for a one time payment (as opposed to monthly or annual payments like auto insurance) and should NOT be confused with property insurance.

Title insurance is unlike other insurance policies in that you are protected for the period BEFORE the policy was issued, NOT after like every other type of insurance.  I’ll just bet that if you’ve ever purchased a home and asked your real estate agent to explain what it is, and why you need it, they probably glossed over the explanation and just said it was a necessary part of the transaction.

Insuring The Past?

It seems odd that someone would buy insurance to protect them from something that has already occurred in the past, but that’s exactly what title insurance does.  All the way back to the beginning of time actually (well, maybe not the beginning of time, but pretty far back anyway).  That’s because many things may have happened that had nothing to do with you, but now that you’ve bought the property, you’ve suddenly become involved. Still confused?

The Little House On The Prairie

Lot LineLet’s say, in the example to the right, that after years of cramped apartment living in the city you decide to move to the country.  One day while house hunting, you happen to drive through Walnut Grove and notice a for sale sign on Charles Ingalls’ property (lot #2).  You fall in love with it and buy it immediately for the sum of $500,000 with a loan amount of $400,000.

A few years after living there, your neighbor, who bought the Oleson property next door from Nellie (lot #1) happens to have a survey done on his property and discovers that your home was built partially on his lot.  Back when the home was originally built, they didn’t use survey markers, but since the lots were so large, nobody really minded.  You tell him that it’s not your fault since it happened long before you purchased the home, but he doesn’t care and decides to sue you in court.  Fortunately, you happen to have title insurance!

You’ve got a few options here which include:

  • Moving your home back onto your property
  • Adjusting the lot lines so that your home once again resides fully on your lot (i.e. paying your neighbor some money to purchase the land underneath your home)

So, you call your title insurance company and explain what happened.  The friendly title company negotiates option #2 with your neighbor and pays them off so that now, your property extends beyond your existing home so that it now looks like the illustration below (subject to your deductible of course).  Everyone is happy, and life goes on…

Lot Line - Adjusted

This is just one example of how title insurance can protect you.  In fact, this really did happen to a client of mine in Bothell, WA.  There are many other scenarios that are even more common having to do with forged signatures, liens, etc.  For an example of some of the main differences between the various title policies, click HERE.

Why Are There Two Charges For Title Insurance On The HUD?

It is common to see two different charges for title insurance on the HUD statement.  One charge is for the Owner’s Policy of Title Insurance, and the other is a Lender’s Policy.  A frequent misconception is when buyers think that they are being incorrectly charged for a policy that doesn’t protect them, but rather the lender.  Let me try and explain the differences between the two:

The Owner’s Policy – In Washington State, the seller of the property pays the cost for the Owner’s Policy.  The theory behind this is that they should be guarantee you protection for losses that happened before you bought the property.  The coverage amount is for the total value (purchase price paid).  In the example above, the Owner’s policy would cover you up to $500,000 and the premium is based on that amount.

The Lender’s Policy – Since you financed the purchase with a loan from the bank, they have some risk involved should there be a problem.  As a requirement of their loan, you, the buyer, have to purchase a title policy that protects them in case of a loss.  In the example above, your policy premium is based upon a loan amount of $400,000.  If you paid cash for the purchase and had no loan, then you would not be required to have a Lender’s Policy of title insurance.

There are some minor differences between the Lender’s and Owner’s Policies in terms of coverages, but for the most part, they are mostly identical.  If you want to understand the specifics, drop me a line and I’ll put you in touch with my title officer.

Have you ever had a title problem? Let us know…

When REALiTY BiTES, bite back!

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