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Guide to Owner's Title Insurance

The basics of owner's title insurance

When someone purchases a home, their title company will perform a thorough title search to ensure that the seller has the right to sell and that the buyer has the right to purchase the home. By researching the chain of title and clearing any issues that may be discovered, the homebuyer can have the peace of mind that they own their home free and clear.

Every title company will conduct a thorough title search by analyzing public records such as land surveys, deeds, records, tax assessor information, and even home owner’s association records. If any issues are revealed in the title search, the closing attorneys and closing company are responsible for collecting the items required in the title commitment to present a clear title. Mortgage lenders will almost never issue a loan for a home without a clear title and title insurance.

A lender’s title insurance policy protects the lender from any potential future title issues for the life of the loan. While your title company will conduct a thorough search of all available records, hidden issues such as incorrect records, forgery, will disputes, and undisclosed easements may still arise. This policy will only protect the lender from risks and does not extend to the buyer. A lender’s title insurance policy is in effect for the life of the loan.

In order to protect the homeowner from hidden title risks, they would also need to purchase an owner’s title insurance policy. Without this, they would be responsible for any financial consequences related to title issues, including legal fees and back taxes. An owner’s title insurance policy is a smart move for all homeowners. Most title companies will offer both standard owner’s title insurance policies as well as enhanced owner’s title insurance policies.

Standard owner's title insurance

A standard owner’s title insurance policy extends the protection of the lender’s title insurance policy to the homeowner. This policy is in effect for as long as the homeowner owns the property, not just until the loan is closed. It also extends to anyone who may inherit the property, serves as the trustee of an estate-planning trust, or is a beneficiary of the trust.

Standard owner’s title insurance policies cover only the most typical title issues. According to Stewart Title, this includes, “defects and liens in the history of your title through the date and time your deed is recorded in the public records.” In other words, a standard owner’s policy will cover hidden risks that were not discovered in the title search prior to purchase. While the title company will always conduct a thorough search, they cannot search what has not been disclosed or does not exist in the public record.

Some of these hidden risks include:

  • Forgery or fraud that affects the title, such as a will that has been forged.

  • Problems with the executing or recording of the documents, such as an unauthorized signature. Even honest filing mistakes can cause issues with the title.

  • Liens on the property, including liens for unpaid taxes or HOA fees. These can go undiscovered in the title search when the seller fails to disclose these or due to incomplete bookkeeping.

While these issues are not common, they do happen. And when they do, they have the potential to be financially devastating to a homeowner. Standard owner’s title insurance can provide peace of mind to a homeowner that they have protection from the most common risks to their title.

Enhanced owner's title insurance

Standard owner’s title insurance will cover some of the most common hidden risks, but there are other less common (but still possible) title risks. An enhanced owner’s title insurance will cover all of the risks a standard policy will cover, as well other less common title risks. An owner’s policy will also cover risks that may occur after the deed is recorded.

An enhanced owner’s title insurance policy covers a home as it appreciates in value for five years, up to 150% of the original purchase price. This is particularly beneficial if an undisclosed heir (such as an unknown child from a previous relationship) makes an ownership claim on a home. The enhanced policy not only covers the legal issues associated with the undisclosed heir and the clearing of the title issue, but the coverage is for the actual value of the home, not just the purchase price.

While enhanced owner’s policies can be very helpful in estate purchases, they can also be beneficial when buying new construction. Occasionally, builders may fail to pay their subcontractors. This can happen for a number of reasons, including honest bookkeeping errors. If a builder fails to pay their subcontractor for any reason, that individual can file a mechanics lien against the property up to six months after construction was finished. If your buyer is now the owner of a home with a mechanics lien, they’re now responsible for the payment of the lien. Standard owner’s policies do not cover mechanics liens, but these are covered by an enhanced policy.

Some will say that an enhanced owner’s policy may be unnecessary in a neighborhood with a strong HOA. But HOA issues affecting the title may be more common than you think. For example, if the previous owner built a fence that did not adhere to the HOA covenants, the new homeowner can be liable for removing and replacing the fence according to proper covenants. In this case, it doesn’t matter who built the fence: all that matters is who currently owns the fence. Without enhanced coverage, the new homeowner is responsible for incurring these related costs.

Enhanced owner’s title insurance covers other issues including future forgeries, additional taxes due for the assessed value of the home, and a number of other potential hidden risks. Like the standard owner’s title insurance policy, these title issues won’t frequently happen. But if they do happen, a homeowner would be grateful for the enhanced coverage.

Not every homeowner will choose to purchase enhanced owner’s title insurance. But as a realtor, your job is to inform your client of their options so that they can make an informed decision about their title insurance needs.

Is enhanced title insurance worth the cost?

An enhanced owner’s title insurance policy costs about 10% more than a standard owner’s policy. This relatively small difference in cost covers almost every potential title issue a homeowner may encounter. Because it’s impossible to predict the future, you never know what title issues may occur. Enhanced owner’s title insurance can provide your client with the peace of mind that nothing can threaten their ability to own their home.

Compared to the potential liabilities and the cost of a home, the cost of enhanced owner’s title insurance is minimal. However, your client is the only one who can decide if the enhanced coverage is worth the cost. You can help your client make an informed decision about their title insurance needs. Even if they’d rather not purchase enhanced coverage for their home, it’s always wise to purchase a standard owner’s title insurance policy at closing.

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