Borrowers ask me this question all the time. The resounding answer is maybe. First let’s talk about what it is and what it does. Title insurance insures the beneficiary that no liens exist except those specifically mentioned and detailed in the policy. The title company searches public records for everything that has transpired regarding a specific piece of property for at least the past 40 years. Open mortgages, satisfied mortgages, liens, judgements against the owner, easements and transfers of the property are all in the report. Old mortgages are matched up against satisfactions that are filed in conjunction with them. In fact, that is one of the most common problems. When a mortgage is satisfied it is not uncommon for the lender to fail to file the satisfaction, leaving an open mortgage on the title.
Once all this is sorted out the title insurance company will issue a policy essentially guaranteeing the beneficiary that the title to the property is clean and defensible. Now back to the question. There are two types of policies. The mortgage policy and the fee policy. This refers to the entity benefiting from the policy. If you are the lender you will get a mortgage policy and if you are the owner you may get a fee policy. Virtually all lenders require a mortgage policy and you will be the one paying for it at the closing. The fee policy is completely optional, so how do you decide?
Here are some questions to answer that should help you make the choice.
1. Does the mortgage policy cover the purchase price of the home? The mortgage policy covers only the loan amount so your down payment will be exposed to risk if you do not purchase the fee policy.
2. Was the property ever involved in significant legal action like foreclosure, estate or bankruptcy? If so, there is added risk if the procedure wasn’t done correctly or there are disgruntled former owners or contractors involved. I recommend that you purchase the fee policy if any of the above are found in the search.
3. Did title transfer many times in a short amount of time? This can be an indication the property was flipped and, again, increases the potential for errors and risk. Buy the policy!
4. Finally, does the report show that Mr. and Mrs. Jones have owned it for forty two years and that’s the only thing in the report? You are probably safe with out the policy.
Think of title insurance as attorney insurance. That’s what you are really paying for in advance; the title companies guaranteed legal defense of any claim against the ownership of your property. With out the insurance you cold pay thousands of dollars to defend a claim instead of a couple hundred dollars when you purchase the property.
