Are You Really Covered by Title Insurance?

Title insurance protects the buyer from errors and omissions in the title search – a search performed by the title company going back dozens of years to ensure that your home is free from any other claims of ownership.
If you paid for title insurance when you got your home loan, you probably think the house is truly yours (well, yours and the bank’s) and that the house’s past history can’t come back to haunt you.
But you could be wrong.
A Connecticut man once bought a house, not realizing that the previous seller had two outstanding mortgages on it. The seller’s last name was The First American Corp., but when one of the loans was recorded, it was misspelled as Taquil; thus, a title search didn’t turn it up.

The seller continued to pay on that mortgage after he sold the home – until he ended up filing for bankruptcy. The lender tried to foreclose on the new homeowner. If the Connecticut man had paid cash for his home, had already paid off his mortgage, or had built up equity in the house, his interest wouldn’t have been protected by the lender’s title insurance policy – only his mortgage company’s interest in the home would have been guaranteed.
While misspelled or misrecorded names aren’t that unusual, title insurance is more apt to protect against things like boundary disputes and contractors’ liens – a claim toward your house filed by a builder or contractor who wasn’t paid for work on the house. But any one of a variety of scenarios might come into play, leaving your investment vulnerable if you don’t have the right type of insurance.

Title policy basics
Lender/owner
"A lender's policy (or loan policy) will not provide the consumer with any protections. It will only protect the lender. That is why we always recommend consumers obtain their own owner's title insurance policy,” says Lorri Lee Ragan of the American Land Title Association. “For a one-time fee at closing, an owner's policy will protect the buyer and his or her heirs for as long as they have an interest in the property."
Virtually all lenders require you to buy the lender’s policy when you buy a home to protect their investment. In some states, or with some title companies, you may also be buying an owner’s policy without really knowing it as part of the lengthy list of closing costs. In other states or with other title companies, you may be asked if you’d like to buy the owner’s policy, or you may never even hear about its existence at all.
The lender’s policy, on average, runs about $800 to $1,000 and is based on the amount of the loan, according to recent testimony before a U.S. House committee. The owner’s policy adds still more to your closing expenses (unless, as on much of the West Coast, the seller pays the amount) and is based on the sales price of the house), Ragan says.

Unlike most other types of insurance, though, this is a one-time cost; you do not have to make monthly or yearly payments. The fee covers the lender as long as the mortgage is in effect or the owner as long as the home is owned.
How necessary is an owner’s policy?
Since it protects the equity an owner has in the home – not the amount financed by the bank, which is covered by the lender’s policy – it’s worth it to do the math. If you’ve financed 100 percent of your home, or your equity investment is miniscule (and an amount you won’t be hard-pressed to lose), then you probably don’t need the owner’s policy.

However, if you’ve put a nice chunk of change down on the home before getting a mortgage to pay for the rest, an owner’s policy will go a long way toward protecting your investment.
Just like any insurance, though, it’s a gamble. If you choose not to buy it, you’re betting that no claims will ever arise on your house. The older your house (and the more previous owners it’s had), the more likely you are to find others coming out of the woodwork with claims of ownership. Claims can be as clear-cut as a contractor’s lien or a long-lost relative of a previous owner, or as odd as the Mississippi woman who sold her home but insisted on retaining ownership of any pirate treasure that was ever dug up on her former property, probably in the vicinity of a particular oak tree.
Bargaining down the costs
Whether a re-issue or new, title insurance costs vary widely, typically depending on the home’s sales price. In many instances, the amount is set by your state. It’s not unusual, though, to see additional expenses related to the title insurance, including fees for research, escrow and courier services.
Most buyers don’t think twice about title insurance and just take it from whichever company the lender suggests. But you can shop around yourself and choose the company that offers the lowest costs. You may be able to save hundreds of dollars by looking for companies who don’t charge for those extras – or who are willing to bargain them down.
You can ask your lender for the names of several title insurance companies, check your local Yellow Pages, or even search online. title fee calculator you can use for your area.
A final word
Now the National Association of Insurance Commissioners and the federal government are digging deeper, aiming for national reform that will prevent such abuses from happening in the first place.
So stay tuned to see what changes are made. If you’re buying property now, be alert to possible abuse, such as a lender or real estate agent strong-arming you into working with a particular title company.