Before You Buy or Sell a Home:
THINGS EVERYONE SHOULD KNOW ABOUT TITLE INSURANCE & ESCROW COMPANIES
Studies have shown that nearly 30% of Home Buyers & Sellers overpay for title insurance. This has shown to be even higher with minorities and first-time homebuyers who are unfamiliar with the process and may be taken advantage of by being overcharged or sold additional coverage (sometimes known as endorsements) that they don’t really need.
It is important to understand what title insurance really is, who it benefits and what you really need.
At the end of this article, there are several essential tips and tricks that you MUST understand to make sure that you do not get taken advantage of – please read them carefully.
Understanding Title Insurance
Buying your first home is an exciting milestone, but it can also be a complex process filled with unfamiliar terms and requirements. One aspect of buying a home that often confuses first-time buyers and even experienced buyers and sellers alike is title insurance. Here, we’ll break down what title insurance is, why it matters, and how it protects you as a homeowner.
More importantly, we will show you how not to get taken advantage of!
What is Title Insurance?
Title insurance is a type of insurance policy that protects homebuyers and lenders from financial loss due to defects in the title to a property. A “title” is the legal documentation that proves ownership of a property. Before a real estate transaction is completed, a title search is conducted to uncover any potential issues that might affect the property’s ownership.
Despite thorough title searches, some problems can go unnoticed until after the purchase. Title insurance is designed to protect against these hidden risks, ensuring that you, as the buyer, truly own your new home.
Why Title Insurance is Important
Title insurance is important because it protects you from potential legal claims or liens against your property that may arise due to:
Errors in Public Records
Clerical errors or mistakes in legal documents can affect the title.
Unknown Liens
Previous owners might have left unpaid debts, like property taxes or contractor bills, that could result in liens against the property.
Fraud or Forgery
Deeds or other documents could have been forged, jeopardizing your legal ownership.
Unknown Heirs
There might be undisclosed heirs claiming ownership rights to the property.
Without title insurance, you could face significant financial losses or legal battles to resolve these issues.
Why Title Insurance is Important
Title insurance is important because it protects you from potential legal claims or liens against your property that may arise due to:
Without title insurance, you could face significant financial losses or legal battles to resolve these issues.
Types of Title Insurance Policies
There are two main types of title insurance policies: an owner’s title policy and a lender’s title policy. Each serves a different purpose and protects different parties in the transaction.
Owner’s Title Policy
- Purpose: Protects the buyer.
- Coverage: The owner’s title policy protects the buyer from potential claims against the property’s title. It ensures that you have legal ownership of the property and protects you from financial loss due to title defects.
- Duration: It lasts as long as you or your heirs have an interest in the property.
- Cost: A one-time premium is paid at closing, usually based on the property’s purchase price.
Lender’s Title Policy
- Purpose: Protects the lender.
- Coverage: The lender’s title policy protects the mortgage lender’s interest in the property. It covers the loan amount and ensures that the lender has a valid lien against the property.
- Duration: Remains in effect until the mortgage is paid off.
- Cost: Also, a one-time premium is paid at closing, typically based on the loan amount.
- Does not apply to Cash purchases. In a cash purchase, there is no loan and, hence no requirement for a Lender’s policy.
Why Do You Need Both Policies?
While the lender’s title policy protects the lender’s financial interest, it does not protect the buyer. To safeguard your investment and ensure your rights to the property, an owner’s title policy is essential. Having both policies ensures comprehensive protection for all parties involved in the transaction.
Conclusion
Title insurance is a crucial aspect of buying a home that protects against potential legal and financial issues related to property ownership. By understanding the differences between an owner’s title policy and a lender’s policy, you can make informed decisions and secure your investment in your new home. As a first-time home buyer, this knowledge can provide peace of mind, allowing you to focus on enjoying your new home.
Attorney Opinion Letters: An Alternative to Title Insurance
In some real estate transactions, especially in certain states, an attorney opinion letter may be used as an alternative to title insurance. Here’s what you need to know about this option:
What is an Attorney Opinion Letter?
An attorney opinion letter is a document prepared by a real estate attorney after reviewing the property’s title history. The letter provides a legal opinion on the status of the title, noting any issues or defects that may exist. It serves as an assurance to the buyer and lender that the title is clear, to the best of the attorney’s knowledge.
Pros of Attorney Opinion Letters:
- Cost-Effective: Attorney opinion letters can be less expensive than title insurance, potentially saving you money upfront.
- Expert Analysis: Provides a thorough legal analysis from an experienced attorney, which may offer personalized insights into specific title issues.
Cons of Attorney Opinion Letters:
- Limited Protection: Unlike title insurance, attorney opinion letters do not provide financial protection against future claims or defects that arise after closing.
- No Coverage for Unknown Risks: Title insurance covers unknown risks and hidden defects, while an attorney opinion letter only assesses known issues at the time of the review.
- Potential Liability: If a defect is missed, recourse may be limited to the attorney’s malpractice insurance, which may not cover the full extent of potential losses.
Know the Differences
Title Insurance v. Attorney Opinion Letters
Choosing between title insurance and an attorney opinion letter depends on your specific needs, preferences, and the legal requirements in your area. Here’s a quick comparison:
Aspect
Title Insurance
Attorney Opinion Letter
Cost
One-time premium; costlier
Sometimes cheaper upfront
Protection
Covers future unknown defects
Covers only known issues
Financial Security
Provides financial coverage
No coverage
Legal Assurance
Protection from legal claims
One-time legal opinion, no guarantees or coverage
Duration
While you own the property
One-time review before closing, no coverage after
Coverage
Lenders and owner policies, owner is covered
Lender policy still required, no insurance for homeowner
Conclusion
Title insurance is a crucial aspect of buying a home that protects against potential legal and financial issues related to property ownership. Understanding the differences between an owner’s title policy and a lender’s policy, as well as considering alternatives like attorney opinion letters, can help you make informed decisions and secure your investment in your new home. As a first-time homebuyer, this knowledge provides peace of mind, allowing you to focus on enjoying your new home.
Note: In most cases the cost between an Attorney Opinion Letter and an Actual Title policy is negligible at best, so for the small difference in cost it is better to have the actual insurance just in case. The only exception to this may be when refinancing a home you already own as the risks are much lower there is usually an existing title policy already in place.
Additional Inspections you may wish:
Although most home inspectors are quite good at what they do, remember they are there to inspect the entire home and all of its components. They tend to know a good deal about all aspects of a house, but they are not specific experts.
They can only tell you if an item is working, how old it is, and what its expected life is.
For expensive items such as the HVAC unit (air conditioning and heating), they cannot tell you when it was last serviced, if the coolant levels are correct, or if it is leaking or on the verge of extinction.
The same goes for roofs. A home inspector can give you a visual inspection of the roof and estimate its age and life remaining but still may not uncover hidden issues or damage.
In many cases we recommend not only a home inspection but that you also call an HVAC company to check the systems and pressures and possibly a roofer for a more in-depth evaluation.
Roofs are a major cost
In many areas of the country, the roof’s age can drastically affect how much your homeowner’s insurance will cost and, in some cases, make it impossible to obtain insurance without replacing the roof.
In some states, insurance companies will not insure an asphalt shingle roof if it is more than ten years old (and a tile roof to be no older than 20 years) – So watch this and know that if the roof is close to that age – that you will likely need to replace it soon and roofs are very costly.
Another reason we recommend a separate roof inspection is so that you know how long before you will have to replace the roof and what it is going to cost when you do so that you can plan and budget accordingly.
The same goes for a separate HVAC inspection, a typical HVAC replacement for a single unit in a home can be over $12,000. You need to know its condition and remaining life so that you can plan for the future expense (depending on the area of the country that you live in HVACs only have a typical life of 7- 10 years. If the unit is already 6 years old when you buy the home – you may be looking at a major expense very soon.
Additional Inspections you may wish:
Although most home inspectors are quite good at what they do, remember they are there to inspect the entire home and all of its components. They tend to know a good deal about all aspects of a house, but they are not specific experts.
They can only tell you if an item is working, how old it is, and what its expected life is.
For expensive items such as the HVAC unit (air conditioning and heating), they cannot tell you when it was last serviced, if the coolant levels are correct, or if it is leaking or on the verge of extinction.
The same goes for roofs. A home inspector can give you a visual inspection of the roof and estimate its age and life remaining but still may not uncover hidden issues or damage.
In many cases we recommend not only a home inspection but that you also call an HVAC company to check the systems and pressures and possibly a roofer for a more in-depth evaluation.
Roofs are a major cost
In many areas of the country, the roof’s age can drastically affect how much your homeowner’s insurance will cost and, in some cases, make it impossible to obtain insurance without replacing the roof.
In some states, insurance companies will not insure an asphalt shingle roof if it is more than ten years old (and a tile roof to be no older than 20 years) – So watch this and know that if the roof is close to that age – that you will likely need to replace it soon and roofs are very costly.
Another reason we recommend a separate roof inspection is so that you know how long before you will have to replace the roof and what it is going to cost when you do so that you can plan and budget accordingly.
The same goes for a separate HVAC inspection, a typical HVAC replacement for a single unit in a home can be over $12,000. You need to know its condition and remaining life so that you can plan for the future expense (depending on the area of the country that you live in HVACs only have a typical life of 7- 10 years. If the unit is already 6 years old when you buy the home – you may be looking at a major expense very soon.
Will you need a “Four Point”?
A Four-Point Inspection is a specific type of home inspection that evaluates four critical systems in a home. It’s commonly required for older homes, especially when applying for homeowner’s insurance in many states like Florida. This inspection helps insurance companies assess the risk of insuring a property.
What does a four-point inspection cover? >>
and remaining lifespan. Checks for leaks, damage, or missing shingles.
(e.g., aluminum, knob-and-tube). Checks for outdated or unsafe panels,
breakers, or electrical hazards.
or materials prone to failure, like polybutylene pipes
of the HVAC system. Ensures the system is operational and safe.
Why is a Four-Point Inspection Needed?
Insurance companies use the Four-Point Inspection to determine if the home is insurable or if updates are required before issuing or renewing a policy. Older homes are often seen as higher risk, so this inspection ensures that the home’s key systems are functional and meet safety standards.
Who Pays for a Four-Point Inspection?
The buyer or homeowner usually covers the cost. It’s less comprehensive than a full home inspection, so it’s typically more affordable, costing around $100 to $200. Many home inspectors will include the “Four Point” for free when they are hired to do a full inspection. Always ask!
Difference Between a Four-Point Inspection and a Full Home Inspection
- Four-Point Inspection: Limited to the four key systems for insurance purposes.
- Full Home Inspection: Covers the entire property, including structural components, appliances, and more.
When Do You Need a Four-Point Inspection?
- Buying an older home (usually 25+ years old).
- Applying for or renewing homeowner’s insurance, especially in areas prone to hurricanes or other risks.
Bottom Line
A Four-Point Inspection is a targeted review that ensures older homes are safe and insurable. It’s a straightforward process but essential for securing insurance coverage and understanding the condition of a property’s most critical systems.