What is title insurance and why do I need it when buying a home in Olympia WA?
What is title insurance?
The home you are buying may have been sold many times and gone through many ownership changes. Along the way, there may have been a forged signature in transferring the title, or unpaid liens against the property, or an heir to the property emerges, just to name a few examples. Even though title companies perform an extensive search of public records each time title is transferred, title companies are not infallible. Title insurance is an insurance policy that protects buyers and their lenders against a loss due to a title defect.
Who pays for title insurance?
In a real estate transaction where the buyer is securing a mortgage to purchase the property, both buyer and seller purchase title insurance. Lending institutions require title insurance in order to offer a mortgage on the property. Buyers traditionally pay for their own owner’s policy as well as their lender’s policy; sellers pay for title insurance to deliver clean title to the buyer.
If a buyer is not using a lender to secure a mortgage, the title policy the seller purchases is typically sufficient for the buyer.
How long is the title insurance policy in effect?
Title insurance is purchased once for the property and paid for at the time of the sale. There are no monthly premiums like with other types of insurance policies. The owner’s title policy remains in effect as long as you own your home.
However, the lender’s policy terminates when the mortgage is paid off. This also applies if the homeowner refinances their loan, where their original loan is paid off and they secure another mortgage (hopefully at a much lower interest rate). Therefore, if the homeowner refinances their mortgage, a new lender’s title policy will be issued to check for any title issues that may have come up since the time of the purchase. For example, during your homeownership, a lien was filed against your property. A new title search will reveal this lien, and the lender will require this lien to be cleared in order for you to refinance your mortgage.
What kind of title insurance is available?
There are three levels of title policies – Standard Owner’s policy, Homeowner’s policy, and the Extended Coverage policy. (This is not to be confused by the lender’s policy or the owner’s policy. That states who the policy is for; this section is about what types of title insurance is available.)
You mean there’s a difference between an Owner’s policy and a Homeowner’s policy? Yes!
Standard Owner’s Title Policy
Some of the risks a Standard Owner’s title policy covers are:
- Someone else owns an interest in your title
- Forgery and fraud
- Recorded judgments, liens, encumbrances against the property
- Incorrect legal description
- Improperly recorded deeds and other documents
Homeowner’s Title Policy
A Homeowner’s title policy covers the above and many more risk items such as:
- Mechanics liens (learn more about mechanics liens here)
- Unrecorded easements and homeowner association liens
- Building permit violations
- Discriminatory covenants
- Encroachment issues
Extended Coverage Policy
This policy covers risks such as:
- unrecorded liens
- claims of ownership by parties undisclosed in public records
- survey and boundary issues
How to choose title insurance?
Discuss your title insurance options with your Realtor and your title officer. The Standard Owner’s policy is not as comprehensive as the Homeowner’s policy. If you were to list out the risks each policy covers, the Homeowner’s policy covers nearly three times the number of risks than the Standard policy. The Homeowner’s policy is slightly more expensive than the Standard policy, by about 10% in Olympia, WA (which in many cases is about $100), but the benefits far outweigh the small cost.
Sometimes you may not have these three choices of title insurance available to you because of the location of the property and also because of the property type. For example, if the home is on an area of land over five acres, many title insurance companies will not offer the Homeowner’s policy and instead will issue an Owner’s policy.
The Extended Coverage Policy carries certain requirements for this policy to be issued which may include getting a survey of the property. This can add quite a bit to the cost of this policy, which the buyer would traditionally pay for, but may be a good option if purchasing a larger parcel of land.
Title insurance policies, fees and requirements vary by state. These are the general policies for Western Washington. Be sure to contact your Realtor or your title officer with any questions for your particular transaction.