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Insurance Info: Is Title Insurance Mandatory?

Monday, November 8, 2021

You are purchasing a home. Your real estate agent includes on your list of closing expenses payment of the lender's title insurance.

We all know there are great reasons for purchasing title insurance, but everyone wants to reduce closing costs. The question you may be asking is whether title insurance is mandatory.

The answer is both yes and no because there are two types of title insurance. One is mandatory and protects the lender. The other is voluntary and protects you.

When shopping for home insurance, one of the best policies you can invest in is title insurance.

Mandatory vs Voluntary Title Insurance

The purpose of title insurance is coverage against third-party claims that come up after the real estate closing. These are items not found during the initial title search. Problems may not appear until years after you are in your home.

When you buy a home, the mortgage lender orders a title search. The title company they hire conducts a search for public records regarding the real estate you plan to purchase. This includes items such as liens, easements, encumbrances, or defects in the title.

When conducting their search, the title company will check for mortgages, divorce decrees, tax records, child support liens, and more. If their search reveals any problems, they need to be resolved prior to the lender agreeing to the loan.

Many people have the false impression this title search protects them as the buyer.

Lender’s Title Insurance Is Mandatory

The above description provides protection only for the lender’s financial interest. It is mandatory for the buyer to pay for the lender's coverage when purchasing real estate.

The insurance makes sure that the lender has the first claim on the property, above all other liens against it. This policy only protects the lender.

An example of this policy in operation is if you are losing your home because the property was sold to you under fraudulent circumstances. You will likely stop making your mortgage payments.

The lender files a claim with the lender’s title insurance company and recoups the mortgage payments they no longer receive from you. This means they have recovered their investment in the lost property. They retain the deposit and payments made by you, plus the insurance claim for the balance.

The lender’s title insurance does not provide you with any protection. Without an owner's title insurance policy you will lose your entire investment. 

Owner’s Title Insurance Is Optional

An owner’s title insurance policy is optional. This policy provides protection that is generally equal to the purchase price of the home. The policy requires a one-time payment and remains in place for the time you or your heirs have ownership of the home.

Owner policies provide far more coverage than the lender’s insurance. Coverage includes the costs of paying off liens that were not found during the lender’s title search. If a lawsuit entails because of someone claiming they have a right to your property, your defense costs will be paid by the insurance.

The owner’s title insurance coverage continues to the extent that if you attempt to sell your home and a title search reveals a problem, the insurance will cover your expenses.

There are circumstances that do not have coverage under an owner’s policy. This includes problems you create by failing to pay a contractor for repairs, failing to pay property taxes or liens by attorneys you hire. 

Title insurance is unable to protect you against eminent domain. That is when the government takes your property for a public purpose.

For example, when the expansion of the Blue Water Bridge plaza in Port Huron, Michigan was in the planning stage, more than 100 homeowners were forced to sell their property.  

Standard vs Enhanced Owner’s Title Insurance

When shopping for owner’s title insurance, you need to decide whether to purchase a standard or enhanced title insurance policy. The enhanced will cost you more money but has 28 additional benefits.

Standard Coverage

  • Someone owns an interest in your property title
  • A document lacks a proper signature
  • Chain of title has duress, forgery, or fraud
  • Recording of documents improper
  • Restrictive covenants on the property
  • The title has liens from a mortgage, deed, violates a restriction in Schedule B, or is unmarketable

When you purchase a standard owner’s policy, the above are the only items you have coverage for if a problem arises.

Enhanced Coverage

  • All items under the standard policy
  • Mechanic’s lien
  • Removal of the structure due to:
    a. Extending onto another property or easement
    b. In violation of a Schedule B restriction
    c. Violation of zoning law
  • Unable to use the land for single-family residence because of Schedule B restriction or zoning
  • Homeowner’s association unrecorded lien
  • Easements that are not recorded
  • Violation of building permits
  • Violation of a restrictive covenant
  • Post-policy forgery, encroachment, or damage from extractions of minerals or water
  • No auto or pedestrian access
  • Legal description and maps do not match
  • Post-policy prescriptive easement or adverse possession
  • Violation of a covenant causing reversion of title to a prior owner
  • Building setback regulation violation
  • Covenants that are discriminatory
  • Payment of rent for substitute facilities or land
  • Rights under unrecorded leases
  • Policy coverage and restrictions for plain language statements
  • Violations of subdivision law
  • Fence and boundary wall encroachment
  • Enhanced marketability due to added ownership coverage
  • Coverage for post-policy inflation of 150% over five years
  • Living trust post-policy coverage

Do not assume that because you are purchasing a new home, the title is clean. Many of the above problems are possible in both new construction and older homes.

Get a Quote Today

You now know that title insurance is mandatory when financing your home. The decision on whether to purchase an owner's policy is up to you. The benefits far outweigh the risks if you forgo this coverage.

Selecting the best insurance company coverage may make a difference in later out-of-pocket costs and protection. At Heartland Abstract, we provide you with the best purchase power by covering fees that other agencies charge to handle.

Before signing on the dotted line, we recommend visiting our fees checklist to calculate your total policy cost. We invite you to call us at (610) 326-6300 for a quote or to answer any questions you may have.

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