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). It may also include a financial loss, whether direct or in terms of future market value of the property. A company providing this type of insurance is called either a title company or a title insurance company.
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.
If there’s a recorded easement that the title company does not find when a home is sold, and the buyer is surprised by it after the closing, that title company may be writing a check to the new owner for the loss incurred in market value due to that easement, which should have been found.
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.
Title insurance covers smaller issues too, such as finding out later that a major component of the home has a building permit violation.
Who has an interest in a property? Sometimes it’s just the owner but often others have a right or interest too. Most often, these interests, easements or liens are recorded, but sometimes they are not recorded. And at other times, they are hidden (such as with secret marriages or secret heirs). If there’s a recorded easement and the title company does not find it, there could be a loss that the title company might have to pay for the decreased value of the property due to the unknown easement.
In the extreme (and most feared) case, perhaps some real estate was sold illegally, say due to a forgery or some other deceit, but the loss by the true owners to the title wasn’t noticed or discovered right away. Some time later, perhaps several sales later, the error is realized. Now we have a problem: the current “owner” paid for the house, but someone who never really sold it shows up and says it’s his or hers. What happens to all the in-between or past owners who never rightfully owned the property? Where’s the recourse now? That’s where title insurance comes into play.
Luckily, claims for title insurance are seldom made, but when they do happen, they’re expensive!
There are two main categories of title insurance: owner’s policies and lender’s policies. When you purchase a home in the Santa Clara County area of Silicon Valley, the seller ordinarily pays for the owner’s policy of title. That policy will be good for as long as you own the home. If the purchase of the property is “all cash”, only the owner’s policy will be needed.
In most Santa Clara County real estate deals, the buyer finances all or part of the purchase with some sort of loan. When that happens, the lender requires a lender’s policy of title insurance so that the lender’s interest is also covered. Usually, the buyer ordinarily pays for the lender’s policy of title. The lender’s policy is good as long as the current loan is in place. Should you refinance, you’ll have to buy this type of insurance again (unlike the owner’s policy).
Further, there are two levels of coverage with title insurance: the standard level is the California Land Title Association (CLTA) and the extended coverage or ALTA (American Land Title Association), which is sometimes called the Homeowners Policy of Title (HPT) Insurance. The latter simply covers more, including things such as unrecorded easements. Guess which one the lender usually requests? You guessed correctly if you guessed the more extensive policy! The seller is usually obligated to provide owner’s coverage to the buyer, but is not required to buy the more expensive, and more extensive policy. So you might want to learn a little more about these two and see if, as a buyer, you’re willing to pay the difference to upgrade the type of owner’s policy you receive. Old Republic Title has a good comparison chart online which you should find helpful.
If you are interested in purchasing a foreclosure on the courthouse steps, you’ll probably need to pay for the home in cash and most likely will be unable to get title insurance until sometime after you take possession of the property.
According to Old Republic Title, title insurance is an American invention. It was first introduced in the late 1800s. I’m a little surprised it came in so late, because every time this land had a turnover in government, the ownership of lthe property came into question. Our Santa Clara County was, at various times, claimed by the native Ohlone, Spain, Mexico, The Republic of California, and then the United States of America. When the various land grants or patents came into play, landowners had to go before a magistrate to plead the case that he or she really owned the property in question.
Silicon Valley is a region near the southern part of the San Francisco Bay, consisting mostly of Santa Clara County but spilling over into a couple of other adjacent counties. Here’s the list of “who pays what” as is customary in each county (it’s always negotiable, though).
Owner’s Policyof Title Insurance
|Lender’s Policy of Title Insurance||Escrow Fee (title company)|
|Santa Clara County(San Jose area)||Seller Pays||Buyer Pays||Seller Pays|
|San Mateo County(Redwood City area)||Buyer Pays||Buyer Pays||Buyer|
|Santa Cruz County(Scotts Valley area)||Buyer/Seller 50/50||Buyer Pays||Buyer/Seller 50/50|
|Alameda County(Fremont area)||Buyer Pays||Buyer Pays||Buyer Pays|
Deductibles & maximum limits of liability with your coverage
Depending on the problem for which a claim is filed, there may be limits on the payout by the title company for covered items. The preliminary title report may state that for certain covered items, the deductible amount may be 1% of the policy amount or a set dollar amount, such as $2500 or $5000 or some other figure, whichever is less.
Recently clients of mine had a bad surprise with a building permit violation. The first bad surprise was the cost to rectify the violation. Then it seemed that the cost would be covered by title insurance, as it was a named item for coverage. However, the cost to fix the violation was less than the deductible amount, so my clients had to foot an expensive bill – for a violation which they did not themselves cause.
At the same time, those covered items may have limits of exposure by the title company, and the named amount could be $5,000 to $25,000 for instance.
What about buying a foreclosure – can I still get title insurance?
If you purchase a pre-foreclosure home, a short sale or bank owned home you should be able to obtain title insurance. If, however, you purchase a home at auction, or on the courthouse steps, you may not get a regular grant deed and you may not be able to get title insurance. Remember, if you buy at the courthouse steps auction, it’s cash and there are no warranties. Some home buyers have been very successful picking up cheap homes that way, but others have spent a lot of money and only gotten a nightmare in return. It is imperative to know what you are doing, put in a LOT of research and be triply careful if buying this way.
More information about title insurance
Several local title companies have great information online, so next I’ll share some of those links with you:
Title Insurance (article on the California Association of Realtors website, very comprehensive and concise)
Should you pay for title insurance if you buy “all cash”? Some home buyers fail to see the worth because claims are so seldom. However, if there is a problem, the cost to rectify it far, far outweighs the cost of the policy.