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Title Insurance

Understanding Title Insurance

Of the many closing costs associated with buying real estate I get the most questions about title insurance.

"What is it?"

Title insurance works very much like other insurance. You pay a premium to the insurance company for coverage in the event of a loss. In this case, however, you are insuring against losses that you might experience on the "title" to your home. A property's "title" is its legal history- who owned it, potential liens (claims of a legal interest in the property), who has easements over the property, etc. Title insurance provides for coverage in the event you experience a loss related to your property's legal history.

Title insurance is essentially a guarantee to the world that you are the legally recognized owner of the property. If anyone can prove otherwise, your insurance company will cover the loss to you.

What are losses I could suffer because of my property's legal history?

Due diligence requires that title to a property be examined before any deal is closed. (Sometimes it makes sense to do the title exam before even tendering an offer or signing a purchase and sales agreement.) A through exam will reveal most if not all problems there may be with the title. But most title exams are effective back only to certain date. In Vermont we typically use a 40 year "look back" period.

With that in mind, it's easy enough to come up with scenarios that might pose a threat to your title once you own the property: 50 years ago a survey misidentified the boundaries of your property and those adjacent to it, and your neighbor discovers the problem and demands to correct it. Or an easement you thought provided you access to the property turns out to have expired and now your property is landlocked.

In each instance you may suffer a loss in the value of your title. An investment property which can no longer be used for the intended purpose has lost monetary value. Hiring an attorney to fix the title defect of defend you in court will cost both time and money.

What does title insurance cover?

That depends. Title insurance comes in two general categories: 1) lender's policy and 2) owner's policy. If you are financing any part of the purchase through a lending institution you will be required to purchase a "lender's policy." This is a title insurance policy that covers the bank's security interest in the property. It provides coverage only to the bank and only for so long as the bank as a security interest in the property. The policy covers the entire value of the loan secured by the property, and covers the costs of defending the bank's interest in the property. You will be responsible for defending your own title to the property and for the costs of doing so.

An owner's policy covers losses to your title to the property, and pays for the costs of defending your title in court. The coverage amount is the entire value of your property, and not just the loan value. An "expanded protection" owner policy allows you to secure additional coverage in the event of more specific losses (having to move a structure because of an unknown zoning violation, your home is damaged by someone using an easement, etc.)

"How much does it cost?"

Title insurance has a one-time premium which is typically paid at closing. The premium is calculated on a lender's policy is based on the loan amount, while an owner's policy will be based on the full purchase price.

Assuming that the property has a purchase price of $150,000, the premium for a mortgage for the full price would result in a premium of approximately $420 for a lender's policy (2015). If the purchase price was $150,000 but the loan was for only $120,000, the premium for a lender's policy will be about $345. Remember, a lender's policy only covers the bank, and it lasts only as long as the bank has an interest in the property.

Owner's policies cost a bit more because they cover the entire purchase price. However, many insurance companies include the lender's policy when you purchase an owner's policy. Using the same $150,000 purchase price as an example, an owner's policy will cost $570. If you are purchasing the owner's policy at the same time you are buying the lender's policy, the cost of the lender's policy is included. The owner's policy ends up costing you an additional $150.

"Should I purchase title insurance?"

Insurance is really about balancing risk with benefit. In some cases a property may have been mortgaged frequently in the last 40 years. Each time a bank gave a loan the title was examined. Absent something unusual in the chain of title (a forged deed, for instance, of a land record that was filed in the wrong index), the risk that there is an unknown threat to the title you take is probably low. In light of the risk the additional security gained by an owner's policy may not seem worth the cost.

In other cases the property you are buying was once part of an old farm that has been subdivided over several generations, with records of divorce and probate peppered through the chain of title. Or the property has been foreclosed upon multiple times. Then the additional cost of an owner's policy may seem reasonable in light of the risk of threat to your title. This particularly true when you take into consideration the discount that occurs when you purchase the lender's and owner's policy at the same time.

When my client's ask if they should purchase an owner's policy I remind them that ultimately the decision is theirs to make. But my opinion is that the discounted price makes the purchase worthwhile. You may never need coverage, but you'll get peace of mind knowing that your investment is protected.

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The Law Office of Robert A. Brazil, PLLC
P.O. Box 468
Star Theater Building
Saint Johnsbury, VT 05819
Phone: 802-424-0220
Toll Free: 866-580-0955
Fax: 802-424-1405
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