Title insurance: quiet but powerful protection for both buyers and lenders

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Published Date 5/17/2019

When homebuyers get their closing cost estimates they inevitably find that a certain portion of their funds goes to pay for title insurance. Title insurance is seen by them and often by the real estate industry as a "necessary evil," as is insurance of any kind. What most individuals don't realize, however, is that stories abound about title insurance saving their homes, and pocketbooks.

Because the title industry is bound by heavy regulations, individual companies are bound by compliance standards from disclosing names and telling stories of their insured clients using names and places. Notwithstanding, here are a few true stories offered by the 150-year old Fidelity National Title Insurance that illustrate just how important title insurance can be in the big scheme of things.

A CLTA Standard Policy was issued to a homebuyer who was a single mom, barely making it on a waitress' salary. She squeaked by qualifying for a special low-interest rate loan from the United States Department of Agriculture Rural Housing Community Development Service, but the loan did enable her to purchase her own home. The Development Service has very strict criteria for low-income individuals. They include limiting the ratio of an individual's salary to their loan payments as well as the percentage they can afford to pay for real property taxes. This woman met these criteria, but an increase in either her loan payments or real property taxes would disqualify her from the loan program, resulting in the loss of her home.

Shortly after her purchase of the property, she received a new tax bill for real property taxes disclosing that the taxes were more than $2,000.00 per year — a figure that would disqualify her from being able to keep her home. After contacting the assessor's office, she was told that the increased taxes included a special assessment for a special street tax, which had never been shown to her in the preliminary report that both she and the loan program had received. What she was to find, however, was that her title insurance was designed to protect her property not just from the past but for the future as well. In the end, she was protected against a challenge of this kind and was able to keep her home.

In another case a real estate broker purchased an undeveloped lot in a rural county in Northern California and proceeded to purchase a title insurance policy protecting not only her title to the lot but also a road easement benefiting the lot across adjoining property. The original subdivider had attempted to reserve an easement over an existing road that traversed the boundary of part of the property that was owned by others. However, the document that attempted to serve the easement was defective because it did not contain the language necessary to give record notice that an easement was being created. When the owners of three of the adjacent lots found out the broker was planning to build spec homes on her two lots, they challenged her right to use the easement. The broker, however, made a claim under her title policy and it was determined that the broker had the right to an easement by implication, necessity and, arguably, by prescription. Following some wrangling and negotiations, the claim was resolved in a matter of weeks. As with many in the industry (as well as the public), the broker had always considered title insurance to be simply a hurdle to delay a closing. However, after having her own claim result in a win, she realized how important title insurance really was.

Before the invention of title insurance, buyers in real estate transactions were responsible for making sure the property they were buying was validly held by the seller. If the title were later deemed invalid or found to be fraudulent, the buyer lost his or her investment. The first title insurance company, the Law Property Assurance and Trust Society, was formed in Pennsylvania in 1853.

There are title policies for both owners and lenders. Just as lenders require fire insurance and other types of insurance coverage to protect their investments, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate, but even a cash buyer is advised to buy title insurance. The title company searches public records to ensure the seller owns the home and there are no issues attached to it.

Even the best title company may miss an issue or two, particularly if errors or fraud were involved. Reasons for procuring title insurance on any type of transaction include liens (debts against the property that predates your purchase), building permit violations, such as a previous owner adding a deck, fence or extra bedroom without a permit, property line errors, as with the example cited earlier, and encroachment protection in case a neighbor suddenly decided to build a structure that encroaches on your property.

Source: fntic, Wikipedia, TBWS

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First Priority Home Loans is a DBA of Anchor Funding, Inc. NMLS #236419 & 1626581. California Bureau of Real Estate, Real Estate Broker Number 01276087. Loans made or arranged pursuant to the California Department of Business Oversight. California Finance Lenders Law license number 603 L293.