There are two types of title insurance policies that you will need to consider when getting a new mortgage. The lender will require you to purchase Lender’s Title Insurance, which protects the lender from future title issues. Yet, that doesn’t cover the homeowner. There is also Owner’s Title Insurance to consider, which is optional for the consumer to get.
Many homeowners may think Owner’s Title Insurance is a waste of money. Owner’s title insurance is paid as a one-time fee as opposed to monthly (like homeowner’s insurance). Also, it will protect you the entire time of owning your home. See this article about what is title insurance, how much it costs when buying a home, and if it is needed on a refi.
What can Owner’s Title Insurance protect me from?
It can protect you from unforeseen issues with your home title. What happens if there are title defects, identity theft, title company dissolution, etc? Here’s a list of some issues where owner’s coverage title insurance could help you.
The law allows contractors and their subcontractors to make a legal claim against the property if they are not paid. This happens more often with subcontractors than with the contractor you are working directly with when building the home. If you had no contact with the contractor, such as buying a home in a subdivision or HOA, how do you know if everyone was paid properly? The scope of coverage provided to the lender can vary in this situation. If claims are made for mechanics lien, the dispute can be expensive. Having owner’s title insurance will cover you.
This is similar to other identity theft situations, but involves the deed to your home. A thief may forge the signature on your deed and then use that document to claim the title. Using false identification, they can then take out a mortgage loan against your property. You will know when this happens if you receive mail to a new home mortgage you had no idea about.
Defective title recordings
A title is defective when the title (house) being sold does not belong rightfully to the seller. Another scenario could be that the seller did not comply with local real estate documentation requirements. If this happens, they could either still own the house or land. Another scenario is the title could be missing one of the previous owner’s signatures. If the title’s new ownership was not recorded correctly you may need to file a “quiet title” action lawsuit, where the court will determine who the owner is based on examining the documents. Again, legal fees are at the owner’s expense.
If the prior owner or any previous owners have unpaid debt on the home, a court will award a judgment lien to the creditor as result of a lawsuit. Usually this is avoided during the mortgage loan process when the chain of ownership is checked in the title search report. If a property has a judgment lien against it and somehow you bought it anyway, next best step is to seek legal counsel.
All these scenarios are costly and aggravating to deal with. This is why lenders will mandate that you get lender’s title insurance.
Refinancing? Ask For a Reissue Rate
If you are refinancing your home unfortunately, you will need to obtain a new title policy. Since the loan amount changes, and the lienholder, and the rate, and many other details change too, a new title insurance policy is needed. Depending on the number of years and state you live in you may be able to get your policy “reissued” at a discounted rate.