For many homebuyers, the real estate purchase transaction is among, if not the most expensive they will make in their lifetime. The amounts can be overwhelming, which isn’t helped by the closing sheet containing dozens of line items for the many costs associated with the process. So, when it comes time to pay for optional items, many buyers balk because they are unwilling to spend anymore. Homeowner’s title insurance is one such item, and “enhanced” title insurance is even more costly. At Cobalt Settlements, we handle transactions in Northern Virginia and Washington, DC. We offer enhanced title insurance, and here’s why we think it’s a good investment.
Title Insurance Covers What the Title Search Can’t Find
“Title” is the documented ownership recorded with the local government agency that tracks property rights in a particular geographic area. The record of title is the first line of proof of ownership, but there are other ways that a party can claim to have an interest in real property. A poorly probated estate, fraud, or incompetency of someone signing legal documents, unrecorded easements, and mechanics and tax liens are some of the reasons that the official record can be displaced in favor of another. These scenarios can arise long after purchasing a home, resulting in the loss of the home or massive costs to correct these defects.
Title searches disclose anything in the county records, which allows the buyer to handle these items or back out the deal at the time of closing. Since these other scenarios are legally impactful and hidden because there are no records, the buyer doesn’t have the opportunity to correct the record or cancel the transaction before taking on a property that may have a hidden defect in the title. Title insurance will pay for some or all of the cost of fixing these unexpected problems when they arise.
The Mortgage Company Title Insurance Won’t Help the Homeowner.
“Title insurance” is often part of a real estate purchase because the mortgage company demands it. However, the buyer needs to understand that this insurance policy benefits the lender exclusively. Some buyers assume that if a problem arises with the title, it will impact the mortgage company. When they use their title insurance to protect themselves, it will cause an unintended benefit to the buyer. It doesn’t work this way. As long as the buyer is paying their mortgage, the lender has no incentive (and possibly no basis) to clear the title. It is only when things have gone totally wrong (e.g., the buyer stops making the mortgage payment and loses the home through foreclosure) that the mortgage company uses the insurance to make themselves whole. Owners’ title insurance is the only real protection for the homeowner.
Enhanced Title Insurance Provides an Additional Critical Layer of Support
A buyer can obtain “enhanced” title insurance for an additional cost. The most beneficial aspect of this enhanced policy comes into play when considering a home repair or remodel. If a prior owner has done work without a permit or a final inspection, it is a lingering potential liability for the buyer. If the buyer wants to do more work on the home or needs to fix a faulty project, a permit may be required, and the building inspector may require additional work to be done to bring the house to code. If this is the case, the enhanced title insurance offers coverage that, while capped, can contribute significantly to this unexpected development, which will more than pay for the policy cost.
Title insurance isn’t necessary … until it is. And then, it can make a critical difference to the buyer. It is not a policy that can be purchased outside of the purchase transaction, so think twice before waiving this insurance when you have the opportunity to get it. Read more about What to Expect at Closing.