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Did you know that owner’s title insurance is optional?

owner's title insuranceThe reality is that there is no law that requires you to purchase an owner’s title insurance policy when you purchase real estate. If you’re going to have a mortgage, your lender will require you to purchase a lender’s title insurance policy to protect their interests, but the owner’s policy is still optional.

If you’ve been reading this blog for any length of time you know that we do our best to give you an insider’s perspective to the real estate industry and we don’t “upsell.” We give you our honest opinion and answer your questions in an effort to help you make intelligent decisions.

The title insurance industry is in a panic, because on August 1, 2015 the HUD-1 settlement statement is being replaced by the Closing Disclosure and the CFPB (Consumer Financial Protection Bureau) who’s responsible for the creation and implementation of the new form is requiring that owner’s title insurance be listed as optional.

Now there are several reasons for this paranoia.

  1. The industry would rather the consumer be under the impression that they didn’t have any other choice but to purchase owner’s coverage, that way they wouldn’t need to explain what it is or why you should have it.
  2. If the consumer knows it’s optional, they might actually start asking more questions and find out that they can actually shop for title insurance & settlement services and save themselves some money by doing so.

We on the other hand would rather you understand the benefits of owner’s title insurance and show you that peace of mind isn’t as expensive as you think.

What is owner’s title insurance?

Owner’s title insurance protects you against title defects created by previous owners of your property.

When you purchase title insurance, a complete search of the property records is completed. The searcher will go back as far as the public records will take them, in many cases even before a house existed on the land. It’s not uncommon to find references to a horse trail that at one time may have existed on you property, or possibly some other historic use of your land.

The searcher is looking for anything that may have occurred during the chain of ownership that would affect your ability to enjoy free and clear ownership or access to the property. Here are a few examples of title defects that would most likely be covered by owner’s title insurance.

Old mortgages that were never paid, previous foreclosures that weren’t executed in compliance with the law, bankruptcy issues that weren’t handled properly, unpaid inheritance taxes, lost heirs that might have a claim to the property, divorce issues where the property wasn’t properly conveyed from one spouse to another, unusual easements that give others access to use your property, unpaid contractors who filed a mechanics lien, unpaid real estate taxes, unpaid municipal liens (water, sewer, gas, trash), unpaid IRS Liens, unpaid state tax liens, etc.

If and/or when one of these issues pop up, you’ll be happy that you purchased an owner’s title insurance policy.

Not only does the policy protect you from financial loss, up to the amount that you paid for the property, but it also covers your legal fees to protect and defend your interests in the property and they can add up quickly.

Standard vs. Enhanced Homeowner’s Title Insurance Policy

There are two options for owner’s title insurance. The standard Owner’s Policy and the Enhanced Homeowner’s Policy. The enhanced policy offers all of the same coverages against title defects that occurred prior to you owning the property, along with limited coverage for defects that occur after you’ve purchased the property. The enhanced policy also has policy limitations and deductibles and the added expense for the policy probably isn’t necessary in most situations.

One of the examples that I hear most often as a benefit of purchasing the enhanced policy is: If your neighbor’s fence is determined to be on your property, with the enhanced policy there’s coverage to relocate the fence. While this is true, there’s also a $2,500 deductible that the homeowner would need to pay before the policy coverage kicks in.

In certain situations the enhanced policy might make some sense, but most common claims that are covered under the enhanced policy would also be covered under the standard policy as well.

When trying to decide which policy is right for you, here are a few things to keep in mind.

  1. If you have a mortgage, your lender only requires a standard lender’s policy.
  2. Approximately 85% of the cost differential between the standard and enhanced policy, goes to the person or agency selling you the policy.
  3. Many in-house title companies affiliated with real estate brokers and agents quote only the enhanced policy rate, and don’t disclose that there is a less expensive policy unless you know enough to ask for it.

How much does owner’s title insurance cost?

Unlike most insurance products there is no monthly or annual premium for title insurance. You pay for it one-time, at settlement when you purchase the property and your owner’s policy coverage lasts for as long as you have an ownership interest in the property.

That one time title insurance premium provides the homeowner with coverage up to the amount that you paid for the property, and covers the mortgage lender up to the loan amount. In Pennsylvania title insurance is typically paid for by the buyer and the premiums are approved by and filed with the state department of insurance.

Here are a few examples of what you should expect to pay for an owner’s title insurance policy in PA based on a $300,000 purchase price, either paying cash or with a mortgage. The total premium is typically based upon the purchase price which in most cases is higher than the loan amount. An exception might be a VA loan where you can finance 100% of the purchase price plus the VA funding fee. In this case the entire title premium would be attributed to the lender’s policy and there would be no additional fee for the owner’s coverage.

Cash    3% 10%    20%
Owner’s Policy    $1,900 $45 $150 $300
Lender’s Policy N/A $1,855     $1,750 $1,600
Enhanced $2,090   $49.50   $165 $330
Enhanced Lender’s N/A $2,040.50 $1,925 $1,760

As you can see, in many cases if you have a mortgage the owner’s title insurance policy is less expensive than all of the “junk fees” associated with buying a new home. By shopping around for your mortgage, title insurance and settlement services, you’ll most likely save more than enough to cover the cost of the owner’s title insurance policy. To find out exactly how much owner’s title insurance costs for your specific transaction you can you can visit our website and receive a complete and accurate quote in just a few seconds.

As always, if you have any questions about the standard vs. enhanced policy, or just a general real estate question that you’d like a second opinion just text, email, call or contact us on Facebook, Twitter or LinkedIn.

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