Title Insurance FAQ
What every homeowner should know about Title Insurance
Title insurance is a unique form of insurance that can be crucial for homeowners, especially during the home-buying process. It is different from other forms of insurance like auto, life, or health insurance, as it covers events relating to the title of a property that may have occurred in the past. Here’s what every homeowner should know about title insurance:
Purpose: Title insurance protects against defects or problems with the title when you buy a home. These can include issues like liens from unpaid taxes, ownership disputes, forgery of a deed, undisclosed heirs, or errors in public records.
Title Search: Before issuing a title insurance policy, the title company will perform a title search. This is an examination of public records to determine and confirm a property’s legal ownership and find out what claims or liens are on the property.
Not Always Mandatory: While a lender’s policy is usually required if you’re taking out a mortgage, an owner’s policy is often optional. However, considering the protection it offers, it’s often a wise decision to invest in it.
Claims Are Rare But Essential: While claims against title insurance are less common than, say, auto or home insurance claims when they do arise, they can be complex and costly. The protection offered by title insurance in these situations can be invaluable.
Regional Variations: Title insurance practices and regulations can vary by state or even by region within a state. Some states have fixed rates for title insurance, while others allow competition between title insurers, potentially leading to varied pricing.
Closing Agent’s Role: In many cases, the title insurance company also acts as the closing agent for the real estate transaction, ensuring that all documents are executed correctly, and funds are disbursed appropriately.
Shopping Around: Depending on where you live, you might be able to shop around for the best title insurance rates. However, in some areas, prices might be pretty standardized.
Review the Title Commitment: Before closing on your home, you’ll likely receive a title commitment from the title insurance company. This document will detail any issues that need to be addressed before the title can be insured. Review it carefully and address any potential problems.
Types of Title Insurance
Lender’s Title Insurance Policy:
Purpose: This policy is designed to protect the lender’s financial interests in the property. If a title defect emerges after the purchase of the property, the lender’s title insurance policy will cover the outstanding mortgage amount.
Requirement: Most lenders require borrowers to purchase a lender’s title insurance policy as a condition of the mortgage loan. It is a standard part of the closing process when obtaining a mortgage.
Duration: This policy lasts until the mortgage loan is paid off. If you refinance, you’ll typically need to purchase a new lender’s policy, even if it’s with the same lender.
Coverage: It typically covers the amount of the loan and provides protection against title defects, liens, or other issues that could affect the lender’s position as the first lien holder.
Owner’s Title Insurance Policy:
Purpose: This policy protects the homeowner’s financial interest in the property against losses due to title defects, liens, or other issues. It can cover the purchase price of the home.
Requirement: While purchasing an owner’s policy is generally optional, it is highly recommended. It is a one-time cost that can protect your significant investment for as long as you or your heirs own the property.
Duration: An owner’s policy lasts as long as you or your heirs own the property. Unlike the lender’s policy, it doesn’t expire when the mortgage is paid off.
Coverage: It can cover the full purchase price of the property and provides a broad range of protection against various issues, including undisclosed heirs, mistakes in public records, and fraud.
New York Title Insurance
Title insurance rates in New York State are set by the New York State Insurance Department.
Rates for all title insurance premiums in NY are filed with and approved by the State. There is little or no variation in rates between underwriters.
Florida Title Insurance
In Florida, title insurance rates are regulated by the Florida Department of Financial Services. As a result, the base rates for title insurance are consistent across title companies. However, there can be additional fees, such as settlement or closing fees, search fees, or endorsement fees, which might vary between companies.
What is Private Mortgage Insurance
Private Mortgage Insurance (PMI) is a type of insurance that is typically required by lenders when a borrower is unable to make a down payment of at least 20% of the home’s purchase price.
- Purpose: PMI protects the lender (not the borrower) in case the borrower defaults on the loan. If the borrower cannot continue making payments and the home goes into foreclosure, the lender is protected against potential financial loss up to the coverage provided by the PMI.
- Requirement: Lenders typically require PMI for conventional loans when the borrower is making a down payment of less than 20%. Some government-backed loans, such as FHA loans, have their own mortgage insurance requirements and do not use traditional PMI.
- Cost: PMI premiums can vary based on the size of the down payment and the loan, but they typically range from 0.3% to 1.5% of the original loan amount per year. The PMI premium can be a monthly addition to the mortgage payment, a one-time upfront premium, or a combination of both.
- Cancellation: Borrowers can typically request the cancellation of PMI once the loan-to-value (LTV) ratio reaches 80%, meaning they’ve built up 20% equity in their home. However, there are specific guidelines for cancellation, which can vary by lender and loan type. By law, in many situations, the PMI must be dropped automatically by the lender once the LTV ratio reaches 78%.
- Benefits for the Borrower: While PMI primarily protects the lender, it does have an indirect benefit for borrowers: it allows individuals to purchase a home with a smaller down payment. Without PMI, many buyers would have to wait longer to accumulate a larger down payment or might be denied a mortgage altogether.
- Loan Types: Not all loan types require PMI, even with a small down payment. As mentioned, government-backed loans like FHA loans have their own mortgage insurance requirements. VA loans, which are available to veterans and active-duty military members, typically don’t require a down payment or mortgage insurance.
- Tax Deductibility: At various times and based on changes in tax law, PMI premiums have been tax-deductible. It’s always a good idea to consult with a tax advisor or check current tax laws to see if PMI is currently deductible.