Who Needs Title Insurance?

 

 

Purchasing a home is one of the most important investments that an individual may make during his or her lifetime.  For many, the experience is extremely stressful.  One reason the process is so stressful is that most people are not familiar with it.  The only time they have any involvement with the home-buying process is when they purchase a home; and they will only purchase a home a handful of times (if that) in their lifetimes.

             One of the less understood aspects of purchasing a home is title insurance, which is distinct from homeowner’s insurance.  Title insurance is protection against loss arising from defects in the title to the property being purchased.

             There are two types of title insurance policies.  The first is a lender’s policy.  This type of policy is required whenever a buyer obtains a mortgage to finance the purchase of the property.  It insures the lender in the amount of the loan against the invalidity or unenforceability of the new mortgage.  The policy decreases as the loan is paid down and expires upon payment of the loan in full.

             However, while a lender’s title insurance policy insures the property up to the value of the mortgage, it will not protect the buyer’s equity in the property.  Accordingly, it is advisable that a buyer purchase an owner’s title policy.  Owner’s title insurance is issued in the amount of the purchase price and insures the title for as long as the buyer (and his or her heirs) owns the property.

             The buyer will have to pay the premium for the title insurance policy (whether it is lender’s policy or owner’s policy).  The premium is a one-time payment made at closing.

             The standard owner’s title insurance policy only protects against losses arising from events that occurred prior to the date of the policy.  Coverage ends on the day the policy is issued and extends backward for an indefinite period.  The standard policy insures against the following types of risks: (a) after the sale is complete, the buyer does not have proper title to the property; (b) there is a defect in or a lien or encumbrance on the title to the property; (c) title to the property is unmarketable; and (d) there is a lack of a right of legal access to and from the insured property.

             An expanded title insurance policy is available in Pennsylvania.  The enhanced policy is much broader than the standard policy as it offers the insured post-closing protection.  In total, the enhanced policy insures against 28 types of risks, including, but not limited to, insurance against (i) someone forging the insured’s signature to a deed or mortgage in an effort to sell or impose a lien or restriction on the insured’s home; (ii) structures that encroach on a homeowner’s land and built after the purchase of the property by a third party; (iii) a cloud on title that exists due to a recorded document containing the legal description of the homeowner’s land (be it intentionally or accidentally) and the homeowner is prevented from completing a loan or sale of their home; (iv) loss of actual pedestrian and vehicular access to the property; and (v) any violation, variation or adverse circumstances affecting the title that would have been disclosed by an  accurate survey.  Due to the affirmative coverages provided in an enhanced title insurance policy, it typically costs about 15% more than the standard policy.

 

— Andrew Berenson