Insurance choices home buyers face

Home buyers & sellers in Silicon Valley hear about various types of real estate related insurance products and they can sometimes be confused with one another: Homeowner’s (or Fire) Insurance, Title Insurance and Home Warranties. We’ll discuss them today and hopefully will clear up the confusion.

Homeowner’s Insurance pays you money to cover losses in the event of a fire or other unseen catastrophe (such as a tree falling on your home, a fire caused by lightening or a fence falling down in a windstorm).  Often there’s a deductible but beyond that you have major coverage for losses in most cases. There are some caveats, of course.  If you purchase a home using financing, your lender will require you to buy this type of insurance.  It is sometimes also called Fire Insurance. 

Homeowner’s insurance does not cover damage from earthquakes or flooding from creeks, rivers or dam failure.  If you have a fixture that fails and the home floods, though, that is probably covered. 

Homeowner’s insurance does not guarantee that if something is destroyed it can be rebuilt.  For instance, in older parts of Santa Clara County (such as downtown Saratoga, San Jose, Los Gatos and Willow Glen) there are detached garages built right up against the property line or very close to it.  In most places there are now setback requirements of about 5 feet or so.  Should that garage burn down (or be destroyed by termites or anything else), it can only be rebuilt, most often, if it’s moved.  Creating a new foundation is expensive – and that may not be covered by your HO insurance.
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Title insurance seems to be a mystery to many home buyers and sellers, so I want to give an overview on it in this post.  We’ll discuss what it is, why it’s needed and when, and also who pays for it. (For the difference between title insurance, home warranties, and homeowner’s insurance, please see another post on this blog: Homeowner’s Insurance, Title Insurance and Home Warranties.)

What is title insurance?

The purpose of title insurance is to protect against loss of ownership of the land, condo, house, estate, or other real estate due to a problem or defect with title. The loss could be complete (losing the property entirely) or partial (losing a portion of ownership or use).

Sometimes the loss could be as a result of a “defective recording” of a document, an improper signing of a document, or much worse, forgery or signing under duress (being forced to sign under undue pressure, such as by blackmail).

Loss of title can also result from hidden heirs who may claim a partial interest in the property. Another type of loss would be if someone claimed an unrecorded easement, which might cause a “partial loss”. When the title is somewhat in question, or considered “not clear”, it is often said that there is “a cloud on title”. What you want, though, is “clear title“. You want to know that no one else will have any kind of right or claim to the property: not a lienholder, not the IRS, not a contractor, not the county tax collector or anyone else.
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How much extra money will it take, beyond the downpayment, to purchase a home in San Jose or Santa Clara County? The answer varies, depending on what, where, and how you buy. Today I’ll offer some general information on home buyer’s closing costs in Silicon Valley.

Just need a rule of thumb on the costs? A generalization, a really rough estimate is two percent of the purchase price, but your actual figure could be substantially more or less. If your loan is a “zero point” product and if you do not need to pay for inspections, your costs should be between .5% and 1% of your purchase price. If you buy a home that needs a lot of inspections and specialized ones to boot (structural engineering report), your costs will be higher.

What makes residential real estate closing costs vary so much?

• The City of San Jose charges a transfer tax which is normally split 50/50 between buyer and seller. The cost is $1.165 per thousand each for buyer and seller (so for a $600,000 purchase price, $990 each)
• Short sales and bank owned properties usually do not have pre-sale inspections available, so you will need to pay for all inspections (this is often a good idea anyway, but at least if the seller has some inspections available you can know whether you’re seriously interested in the property before spending hundreds of dollars on those reports)
• Condominiums and Townhomes will have HOA (Home Owner Association) transfer fees that you’ll have to pay when buying (they also charge the seller hundreds to provide you with a complete packet of documents on the minutes, budget, articles of incorporation, bylaws, newsletters etc.). Often this is about $300.
• Some neighborhoods may have extra bonds and assessments that residents have voted in, and these raise your property tax bill.
• Loan fees can range from a few hundred dollars to several thousand, depending on the mortgage program you choose. Points paid at close of escrow may be a worthwhile strategy for you – discuss it with your lender and your tax professional!
• Are you buying a home “As Is”? If so, expect repairs to be needed even if the home “looks great”. It is not untypical for a house to require about 2% of the home value in upgrades and fixes, so if buying “as is”, factor that in, especially if there are no pre-sale inspections!

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