Almost universally as a house closing or refinance closing approaches, I am asked why the itemized cost for “title insurance” is so high. Sometimes, clients even tell me that they do not have to pay for “title insurance” because they are putting more than twenty percent down, but have confused Private Mortgage Insurance (PMI) with “title insurance.” So, what is title insurance and why do you need it?
To begin with, PMI is insurance designed to protect lenders against losses should the borrower default, and is required by lenders for virtually all borrowers who put less than twenty percent (20%) down. It has nothing to do with who owns or has “title” to the property, and who insures that no one is going to claim against it.
Title insurance is a contract where an insurer guarantees a lender or a home owner that there are no known claims or defects in title caused by past events such as mortgages, liens, or possession of property by another person not the owner. Title insurance companies search public records to develop and document the chain of title and to detect known claims (defects) in the title. For example, the title search may identify an old home equity loan that is still outstanding or that a contracting firm filed a mechanics lien against the owner years before. If they missed those defects, then the title insurance company would pay to have them fixed, even if it meant litigation.
Attorneys universally recommend that their clients get title insurance (“owners policies”), and banks require owners to pay for insurance (“mortgage policies”) to prevent prior owners from interfering with their ownership and lien rights in the property. In most purchase situations in New York the attorney will order the title insurance policy, while banks will likely order the search in a refinance. These one time fees are really insurance premiums paid at the closing.
The importance of title insurance is often maligned but is becoming increasingly clear in this era of post-foreclosure investments in previously “foreclosed” properties. As the media reports lenders halting their foreclosure proceedings in the wake of sloppy foreclosure paperwork, the issue for the new owners becomes– what would happen if people who lost their homes to foreclosure somehow persuaded a judge to overturn the proceeding after the bank turned around and sold some of those foreclosed homes to new families. Title insurance is designed to protect the new owner from this sort of claim. Obviously, its importance cannot be understated. After accepting that premise, the next is to hire a local real estate attorney who can review that title insurance policy to determine whether there might be hidden exclusions in such title policies that might create problems after you close.
The Bottom Line– if you are purchasing a home, and sinking all that you have into your “investment,” whether that is for your own residence or because it is a “hot deal” in foreclosure, purchase title insurance. In some cases, especially if you expect to see immediate gains in the market value, you may want to purchase an additional “market value rider,” which insures the title to the property above and beyond the price you paid to purchase.