Question: We will be refinancing our mortgage in the next few weeks. We purchased our home six years ago, and at that time purchased both owner’s and lender’s title insurance. Our new lender is also requiring title insurance. We have made very little by way of improvements, and do not believe there have been any events which would impact our title. Why do we need to purchase title insurance again? This seems to be just another hidden expense involved in the settlement process.
Answer: Although you should be able to obtain what is known as a “reissue rate,” you will still have to obtain — and pay for — a lender’s title insurance policy.
Oversimplified, title insurance insures a homebuyer — and a mortgage lender — against loss resulting from title defects, whether these defects are known or unknown at the time of the sale or the refinance. In the language of the title industry, the insurance covers both “on record” and “off record” problems.
- A person in bankruptcy who has no authority to sign the deed conveys property to a third party.
- A grandson forges his grandmother’s name to a deed and conveys her property to a third party, or to himself.
- A mortgage (deed of trust) is properly recorded on the land records, but there is no legal description identifying the property which is subject to the mortgage. As a result, creditors are not put on notice of the existence of this mortgage lien.
- A deed (or other legal document) is improperly recorded with the wrong legal description.The list, unfortunately, can go on and on. There are numerous instances where title to real estate has been found to be defective — either based on substantive grounds or technical, legal procedural reasons (such as improper indexing, misfiling or failure to comply with local recording requirements).
Title insurance is designed to protect the lender — and the homeowner — against these risks. Unlike other types of insurance policies, however, title insurance does not cover future risks; its coverage is limited to risks (defects) that are already in existence at the time the policy is issued. According to one Judge:
Insurers in other lines cannot control the risk beyond being careful in the selection of insureds. However, title companies do control the risk; they attempt to eliminate it by the work they do in determining the state of title. Title insurance is not so much the assumption of an uncontrollable risk as it is a guarantee that the title company’s work is accurate and therefore free of risk.
Thus, when you purchased your house several years ago, your title insurance policy covered you — and your lender — for all risks (defects) which existed at time you took title; the policy did not cover future defects.
Several years have passed since you first purchased your home. You believe that your title is clear, subject only to the mortgage which you plan to refinance. However, are you really sure that there are no title problems affecting your title? Did a mechanic place a mechanic’s lien against your property? Did a creditor obtain a judgment against you and have that judgment recorded against your home? Did the home get sold at a tax sale, without your knowledge? Did someone forge your name to a deed and sell the property to a third party?
Or did someone accidentally place a lien against your property (lot 657) when they really meant to place the lien on lot 567?
Strange as it may sound, these things do happen. Your lender wants assurances that should you not be able to make the monthly mortgage payment, and the lender has to foreclose on your property, that you have clear title. Keep in mind that when you obtain a mortgage, you will sign a Deed of Trust. This is a legal document whereby the borrower (homeowner) signs a deed conveying the property to a trustee selected by the lender. That trustee holds legal title to the property, in trust however, for the benefit of both the borrower and the lender. If and when the mortgage is paid in full, the trustee will release the deed of trust back to the homeowner.
However, should the borrower go into default, the trustee (because of the language in the deed of trust) has been given authority by the homeowner to sell the property at a foreclosure sale. This is known as a “power of sale.”
Clearly, the trustee wants to be assured that when he takes title to the property through the deed of trust, he has good, clean title.
Your new lender probably trusts you, since it is willing to make you a loan. However, since you cannot categorically advise the lender that you have clear title, the lender will insist that you obtain a title insurance policy in favor of the lender.
There are two basic types of title insurance policies: lender’s and owner’s. The lender’s policy protects only the lender (or any subsequent lender to whom the loan may be sold or assigned). The owner’s policy protects the homeowner from the potential risks which can arise. Unlike other types of insurance, an owner’s title insurance policy is paid only once — when you go to settlement. The homeowner does not have to make quarterly or annual premium payments. Additionally, an owner’s policy covers the owner so long as there may be potential liability for a title defect; this coverage can — and will — last long after the owner has sold the property.
Here is a real, factual situation: A sold property to B in l982. In l985, B sold to C, who then sold to D in l996. B, C and D all obtained owner’s title insurance. In l997, D’s neighbor sued D, claiming adverse possession of a small strip of land abutting both properties. Since adverse possession in Maryland requires a 20 year vesting period, D’s neighbor had to argue that its right began at least as early as l977. Thus, after D was sued, D brought C into the suit. Needless to say, C filed a claim against B, who in turn brought A into the litigation.
In this litigation, B advised its title insurance carrier of the claim, and the title insurance company picked up the extensive legal fees which were involved in the lawsuit. B was protected, even though he sold his property many years before the lawsuit was brought.
Every homeowner must, however, carefully read the insurance policy. There are numerous coverage exclusions contained in an owner’s policy, such as:
- Taking of the property by a government (called eminent domain);
- Defects, liens or adverse claims not known to the insurance company but known to the insured and not disclosed in writing to the company prior to inception of the policy, and
- Any law restricting or relating to the use or occupancy of the property based on environmental protection.There are a number of such exclusions from coverage, and all homeowners should discuss these issues with their attorney before going to closing (or refinancing).
Finally, you questioned why you have to pay for another full title insurance policy. You don’t have to. As mentioned earlier, the owner’s title insurance policy you initially obtained is still in force and effect. Thus, there is no reason for you to purchase additional owner’s insurance.
As for the lender’s policy, although you will be obligated to obtain such a policy if you want the refinance loan, you may be eligible for a “reissue rate.” This means that if you had a previous policy and no more than ten years have elapsed since you first obtained that policy, you will be charged at a much lower rate than what the title charge would normally be.
It should also be noted that if you are purchasing another property, while you will have to obtain — and pay for — lender’s title insurance if you are getting a mortgage loan, you have the right to reject purchasing the additional owner’s title insurance. You must discuss this option with your settlement attorney at settlement, to get the pros and cons for this decision.
Title insurance is a complex issue. However, it does give some peace of mind to homeowners, especially since we live in a litigious society and property values have risen dramatically in recent years.
Written by Benny L. Kass