My wife and I are planning to buy a house in the near future and I have been doing some research to find out the costs involved besides buying the property itself.
I have a pretty good understanding of most of the requirements like appraisals and home inspections, as well as income verification and credit checks, but I’m not sure about one of the items.
In fact, I have seen one lender that would do away with this requirement if an alternative was provided. I’m talking about title insurance. Every single lender except one required title insurance.
The one lender that did not absolutely require title insurance gave me a list which mentioned something about a title opinion as an alternative to purchasing title insurance. It seems like a title opinion might be a cheaper option.
My wife’s brother is a lawyer and his law firm is located near the town where we are wanting to buy. I think he or someone in his firm could do the title opinion for us instead of getting the title insurance.
Also, I’m not really sure if this is something that we are supposed to buy or if the property owner is supposed to get it for us.
Is title insurance really insurance? Who is the beneficiary of the insurance? Is it the lender? Or are my wife and I the beneficiaries? Or all of us? Could you tell me if title insurance or a title opinion is better? Which is more expensive? Could you explain these things please?
===ANSWER===
Hello John,
Great questions! Let me take each question and break it down.
1) Is title insurance really insurance?
Yes, it is insurance to the lender that the property has clear title. But, it protects you as the buyer and the seller also.
You see, if for some reason a lien shows up on the property after closing, the title insurance is responsible to take care of that since they missed it during the title search. That's how it protects the buyer and the seller.
I actually had this happen to me on a home I sold. It turns out there were back taxes owed in the amount of around $1,900. They were not paid during the final closing process. I was none the wiser to it.
Then the buyer calls me around a year later and wanted me to pay them. I refused considering it was not my mistake, nor was it his.
After refusing to pay the taxes which the title company told me I had a moral obligation to do, the title company had to pay them since it was their mistake.
In my case it paid off as the seller and the buyer benefited also. The taxes were really the buyers since they were property taxes prorated for the year in advance in escrow.
2) Who is the beneficiary of the insurance?
In this case the buyer was the main beneficiary because of the reasons mentioned above.
3) Is it the lender? Or are my wife and I the beneficiaries? Or all of us?
I'll kind of lump these together. All benefit from the title insurance. When you close on the house, you know you have clear title. The lender does not get hit after closing, nor do you and your wife.
As in my experience, the title insurance paid off for all parties except the title company themselves.
What really struck me as funny, the title company tried to make me feel guilty because of their mistake. They were the ones who prepared the closing papers and dispersed the funds to pay taxes, liens etc.
Since they were setting up escrow for future taxes for the buyer, the lender did not have to pay the taxes and then go back and re-do the escrow payments and raise what the buyer would pay each month until it got caught up.
4) Could you tell me if title insurance or a title opinion is better? Which is more expensive? Could you explain these things please?
Again, I'll lump these questions together also.
I think you can see, in my case title insurance was better for all parties involved in the transaction. Of course, with the exception of the title company itself.
Although it was more expensive, since the seller and the buyer both pay title insurance, it did ensure we had clear title. It protected us like any insurance does from a mistake.
Hopefully I explained all this to you so you can understand.
As I think about this, the lender you spoke about that does not require title insurance is asking for trouble in my humble opinion. And even if it saved you a bit of money, the protection from human error is what you are after.
I hope you proceed with caution and consider the possible mistakes that can happen.
If the buyer in the example I'm using here, were you, then you would have to pay the taxes somehow. In our case, the title insurance saved the buyer $1,900. After all it was his taxes the insurance paid, not mine.
On the day of closing, you owe the taxes and not the seller.
If you have any other questions feel free to ask.
Jeff Ragan
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Explain title insurance and title opinions
