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| Each week, the Silicon Valley Association of Realtors (SILVAR) shares local housing data, sales trends, expert insights and other real estate-related topics. This week, the association delves into what homebuyers should know about title insurance. |
A home’s title may be a lesser-known detail of the real estate transaction, but it can cause a sale to fall apart: Ask anyone who has tried to close on a home without a “free and clear” title — meaning the property doesn’t have any liens or other ownership disputes.
A preliminary title report and title insurance protect buyers from potential property defects and financial loss at the time of the sale and over the course of ownership. Understanding these two related, but distinct documents, is crucial for buyers.
Think of a preliminary title report as a health check for the property’s legal history. It’s a detailed document generated by a title company during escrow that outlines the current status of the property’s title, revealing any potential issues like liens, encumbrances or other claims that could affect ownership.
It gives all parties involved — buyers, sellers and their agents — a critical opportunity to address and resolve any title defects before closing.
According to the National Association of Realtors, title companies estimate that 36% of real estate transactions involve complex title issues that need to be resolved prior to closing.
“A (preliminary title report) is essential because it safeguards the buyer’s investment and ensures a clear, marketable title is transferred,” said Sal Covarrubias of First American Title Company in San Jose, who recently shared his insights during a special presentation with members of the Silicon Valley Association of Realtors.
A title search, however, doesn’t always uncover every potential problem prior to closing. Title defects, including deed fraud, can surface years after completing a home purchase and can be complex and costly to resolve. That’s where title insurance comes in. Title insurance, purchased alongside the report, provides extra assurance that if any future claims arise, homeowners are still protected, according to Covarrubias.
How title insurance works
Title insurance is different from other types of insurance. It’s a one-time fee you pay when you close on the property, and it protects you from financial losses due to problems with the title that existed before you bought the property.
“Title insurance is unique because unlike other more common types of insurance, it protects you from past events,” Covarrubias said.
What does title insurance cover?
Unpaid liens or mortgages
Boundary disputes
Forged documents
Claims from missing or unknown heirs
Clerical errors in public records
Title insurance costs can vary, but thecost typically ranges from .5% to 1% of the property’s purchase price.
There are two main types of title insurance: owner’s title insurance and lender’s title insurance.
Owner’s vs Lender’s insurance
OWNER’S INSURANCE
Purpose: Protect’s homeowner’s financial interest and ownership rights
Coverage: Covers financial and legal costs of the homeowner is resolving title issues, such as unpaid liens, document fraud, boundary disputes
Duration: As long as homeowner owns the property
Requirement: Optional
LENDER’S INSURANCE
Purpose: Protect’s the lender’s financial interest (their loan amount)
Coverage: Covers lender’s loan amount and legal costs if title issues surface, like upaid liens, document fraud, boundary issues
Duration: Until the loan is paid off or refinanced
Requirement: Most lenders require it when financing a home purchase
Information courtesy National Association of Realtors
Lender’s title insurance protects the lender — the bank or financial institution that is funding the buyer’s mortgage — in case any title disputes or defects are discovered after a transaction closes. It’s a way for lenders to protect their investment. Lenders typically require buyers to purchase this type of title insurance when approving a mortgage. Coverage lasts only for the duration of the loan.
Owner’s title insurance protects the buyer of the home from possible title issues or disputes that could arise after the home purchase. Owner’s title insurance is optional, but most buyers opt to purchase it, as it protects the owner’s financial investment for the entire length of ownership. It doesn’t, however, cover issues that buyers were aware of prior to the sale.
A real-life example
Covarrubias shared a story about a couple who wanted to build a pool. During the process, they discovered their backyard had a water main running through it. The main had not been properly documented or marked in utility records or maps due to a clerical error by the county. This meant they couldn’t build their pool as planned. They filed a title claim – a formal request for financial compensation from their title insurance policy – and the title company worked with them to have the water main moved, eventually allowing their pool to be built.
Like other insurance policies, title insurance can have a deductible, meaning the homeowner pays a certain amount before the insurance coverage kicks in. The deductible amount always depends on the policy and situation, Covarrubias said.
In the case of the pool, the deductible was $2,000.
Key takeaway: Transparency
Covarrubias said most problems found in a preliminary report can usually be resolved with time and effort.
The most important thing, he said, is for everyone involved – Realtors, clients and the title company – to communicate openly and honestly throughout the process.
Covarrubias said title companies cannot give legal advice, so it’s always recommended to consult with an attorney, especially one specializing in estate planning, for any legal concerns, he said. He also recommends contacting your county assessor’s office. The assessor’s office can’t give you legal advice, but they can inform you what actions would trigger the next steps.
“Our goal is to facilitate the conveyance and help (property owners) sell their property. We just need to ensure the property is transferred safely.” Covarrubias said.
Silicon Valley Association of Realtors (SILVAR) is a professional trade organization representing 5,000 Realtors and affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term Realtor is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of Realtors and who subscribes to its strict Code of Ethics.
Some information provided by the National Association of Realtors.
Real Estate Editor Linda Taaffe contributed to this article.
