If you are building a new home from scratch, you are probably wondering if you need title insurance. If the home is newly built, what history could there possibly be that could cause problems? It’s a good question and the answer is that yes, title insurance is still a good idea for a new construction home. Construction of a new house has the potential to lead to unique title related issues that can negatively impact the lender and homeowner. At the most basic level, other people have probably owned the land before you built on it and a title search will uncover any existing liens and you can also perform a survey to determine the boundaries of the property.
Types of Title Insurance
There are two different types of title insurance. One offers monetary and legal protection to owners and the other is for lenders. Often, in order to ensure everyone involved in the transaction is adequately shielded from risk, both owners’ title insurance and lenders’ title insurance will be necessary.
Lenders’ Title Insurance (Loan Policy)
In nearly all cases, lenders will require the borrower to purchase lenders’ title insurance, called a loan policy, so that the lender’s interest in the property is protected until your loan is paid off or refinanced. It is usually based on the dollar amount of the loan and decreases as you pay down your loan until it eventually disappears as the loan is paid off. This title policy typically comes after a property title search is completed, so while the policy only protects the lender, it does offer some assurance to the buyer. These can include extended policies as well.
Owners’ Title Insurance (Owner’s Policy)
The other type of title insurance is owners’ title insurance, also called an owner’s policy. This is typically purchased by the buyer in order to protect themselves against title problems that may come to light in the future. Owner’s policies are usually issued in the amount of the real estate purchase for a one time fee that lasts for as long as you have an interest in the property. Basically, they provide assurance that the title insurance company will help you monetarily and defend you legally if need be in the event that an unforeseen or hidden title problem surfaces. Owners’ title insurance also has the option for extended policies.
Please note that a recent amendment made to New Jersey’s title insurance laws repeals a provision of the law which considered “rates and charges for personal or controlled insurance from any one source so issued in a calendar year received by a title insurance company or by a title insurance agent exceed 25%, or from all sources exceed 50% of the total rates and charges received by the title insurance company or title insurance agent for title insurance issued in the same year… [as] an unlawful rebate that is subject to penalty.”
In addition to this change, it includes a section that makes the agreement to use the services of a title or settlement company subject to attorney review, which is typically a three-business day period for buyers and sellers to have their attorneys review (and possibly modify) elements of real estate transactions.
The Risks of Going Without Title Insurance
Going without title insurance exposes the parties involved in the real estate transaction to serious risk. The common example is a home buyer purchasing a home and after closing, finding out that the previous owner had unpaid property taxes. Without title insurance, the burden to pay those taxes falls squarely on the shoulders of the new owner. If they cannot pay, they risk losing their home to whoever those unpaid property taxes belong to.
Hazards Covered in Title Insurance
The typical hazards a basic title insurance policy will cover includes the following:
- Claims of ownership by another party
- Flawed or missing records or inappropriate record keeping
- Judgments or encumbrances on the property, like pending lawsuits or outstanding liens
- Improper signatures
- Forgery of documents
- Unrecorded interests by a third party
- Problems associated with a will
While title claims are rare, they can be devastating without title insurance. The problems title insurance protects against are usually claims that would be highly unlikely to be caught with a title search alone.