When we closed on our lot, we had a decision to make re: title insurance. We paid cash for the lot, so title insurance wasn’t required. But just because it’s not required doesn’t mean it’s a bad idea to have a policy in place…
Before we go any further, I want to be sure that we’re all on the same page when it comes to title insurance, so… Here is a (very) quick overview.
What is title insurance?
In short, title insurance is a form of indemnity insurance that protects against losses due to title defects. There are two main types of title insurance policies, one for property owners and one for lenders.
Whenever you take out a mortgage on a piece of property, you’ll be required to purchase a lenders policy to protect the bank’s interests. If any questions re: the chain of ownership, pre-existing liens, etc. arise, no problem.
Sure, a title search should turn up any problems, but these things can sometimes escape detection. And if they do, they could result in a huge financial mess — unless you have title insurance in place.
The lender’s (or loan) policy typically follows assignment of the mortgage, such that it transfers from bank to bank if/when your mortgage is sold. But if you refinance, you’ll need to purchase a new lender’s policy.
Note: Whenever you refinance, be sure to inquire about discounted “re-issue” rates for title insurance. In most case, you’ll save some money since much of the title work has already been done.
While the lender’s policy protects the bank in case problems are discovered with the property title, it does nothing to protect the interests of the property owner. That’s where the owner’s title insurance policy comes in. Without one, you’re putting your investment at risk.
It’s also worth noting that, in some states (but not ours), there are separate policies for construction loans. In this case, the policy is subject to “date down” endorsements that change the value its value as loan disbursements are made. This ensures that the bank’s interests are protected at all times.
Title insurance when building?
So… This all begs the question: should you buy an owner’s policy when building a new house? And, if so, should it be for the value of the land? Or for the (expected) final value of the land + house?
Before making a final decision, I reached out to our closing attorney for advice. The following is a summary of what I learned:
In cases like ours, most people buy an owner’s policy for the value of the land and increase their coverage when the house is complete. Yes, this does expose you to a small amount of risk during the build process, as you pour additional (uninsured) money into the project.
There are a couple of things to consider here.
First, title insurance is 100% backward-looking. As such, it only protects against title defects, liens, etc. that existed at the time the policy as issued. Thus, any policy that you buy at the outset will offer no protection against things like mechanic’s liens arising from the build process.
Second, when building in a well-established subdivision, it’s worth noting that the property title has already been examined repeatedly. This would have happened when the developer first bought the land, and then each and every time someone bought a subdivided lot from that original parcel. In such cases, the odds of a title defect escaping notice are relatively low.
The attorney’s advice was thus to start by buying a title policy to cover the value of the land. From there, it’s simply a matter of endorsing it at the completion of the project (i.e., when you close your “permanent” mortgage) to reflect the full value of the now-improved property.
Side note: I really hate the term “permanent mortgage,” as it implies that you’ll have a mortgage forever. We won’t, and (hopefully) you won’t, either. But that’s the industry term for a traditional mortgage, so I’m using here for consistency.
In his view, this approach is the most economical solution. Why? Because you receive a discount on the cost of the loan policy whenever they issue owner’s and lender’s coverage at the same time. By waiting until the end to increase the policy to the full value, we’ll capture these savings.
If you go ahead and buy the owner’s policy for the full amount up front, that’s fine. That policy will be in place as long as you own the property with no need to re-buy if/when you ever decide to refinance.
As noted above, however, such a policy won’t cover you for problems stemming from your builder’s actions, nor will you get the discounted rate on your lender’s policy when you convert to permanent financing.
During our discussion, the attorney offered up two final bits of wisdom:
First, he always likes to have a title policy of some sort in place. Even if it’s just for the value of the land and problems arise later on, it’s nice to have the insurance company in your corner. Sure, we might have more at stake than they do, but they’ll still put up a fight to avoid paying out.
Second, he told us that we had already done the #1 thing to protect our interests: we chose a reputable builder with a rock-solid history of paying his bills. This dramatically reduces the risk of liens arising from unpaid suppliers and/or subcontractors if the builder flakes out.
Buying title insurance
At the end of the day, we followed the closing attorney’s advice. We bought a title insurance policy for the value of the land at a cost of $245.75. We’ll then increase our coverage to the full value of the land + house when we close out the construction loan.
As noted above, this approach provides us with a degree of protection in the short-term while providing us with a discount on the lender’s policy when convert to a traditional mortgage.
Could we get away without an owner’s policy? Sure, it’s not required, and the chances of having a problem in the long run are relatively low. But we’d rather buy the policy — remember, it will remain in force as long as you own your home — and not have to think about it.
Should you buy title insurance? That’s entirely up to you. It’s also up to you to decide how best to structure the policy. Hopefully, the discussion above has given you some things to think about.