What is title insurance and why do you need it?
Low-to-moderate income buyers are eager to avoid buying things that aren't required, but they need title insurance more than anyone.
Home buyers get peppered with fees, so the temptation to opt-out of title insurance can be strong. The policies typically cost about $2,000 on a $500,000 home, and who couldn’t use an extra two grand? Experts say the time, money, and aggravation a homeowner’s title insurance policy can save is more than worth the premium.
“Odds are you won’t need it, but the cost to remedy a title defect relative to the cost of the policy can get really out of scale,” said Eric Stevens, director of sales for Silva Law and QuickSilva Title. “It’s no-brainer.”
Title insurance is a one-time payment and it covers homeowners — and their heirs — for as long as they own the home, Stevens said. That $2,000 policy could still be protecting your heirs in 50 years, at which point the cost would work out to less than a penny a day.
The insurance protects the policyholder from financial losses should there be a hidden defect in the title. Say a homeowner dies and you buy the property from his or her estate. Six months (or six years) after you move in, an estranged daughter of the former owner shows up with a will saying she would inherit the house. She might claim her siblings had no right to sell it to you because they didn’t legally own it. Therefore, neither do you.
If she sues you for the property, it’ll be expensive. If she wins, it will be even more expensive. Minor defects in title can be cleared up relatively inexpensively in a few weeks, but big claims are not unheard of.
Lenders require home buyers to purchase title insurance that protects the lender. That way, if the estranged daughter shows up and things don’t go your way, they’ll get back the money they loaned you. But if you didn’t buy title insurance for yourself, you’ll be on your own. If you choose to take out title insurance, read the policy carefully. Some policies’ coverage is limited to the purchase price of the property. Others cover its fair market value at the time of the claim.
Stevens said title insurance policies can cover dozens of other things such as: losses when a previous owner failed to get a permit for work done on the property, the forced removal of a wall or fence encroaching on a neighbor’s property, and even an erroneous legal description of the property.
“It’s just like every other kind of insurance,” Stevens said. “You don’t need it until you need it. I don’t intend on getting T-boned at an intersection this afternoon, but if I do … I’m glad I have insurance policies that will cover me.”
Rich Vetstein, founding partner of Vetstein Law Group, said the foreclosure crisis created a lot of title issues. Lenders sold loans and servicing rights so quickly and so often in the early 2000s that the paperwork got very sloppy, he said, adding that too often the lenders that foreclosed on a property weren’t legally entitled to do so, rendering all subsequent titles defective.
“There were a lot of these cases after the foreclosure fiasco,” Vetstein said. “Many people who bought a property post-foreclosure and didn’t buy insurance were stuck having to figure it out for themselves. It’s an example of what can go wrong even if you play by the rules and the importance of being insured.”
Vetstein said condominiums are also fertile ground for title insurance claims.
“I worked on a case where there were two adjacent condo developments side by side and one pool was erroneously deeded to the wrong complex,” Vetstein said. “The insurer ultimately paid out millions.”
Because lawyers receive commissions on title insurance policies, they have a financial interest in promoting them, but Vetstein said he believes in title insurance so strongly that he bought a policy on his own home. He said he declines to represent home buyers who refuse to protect themselves with a policy.
Because Greater Boston’s housing stock is so old, there is more risk of title defects because many of the properties have been sold multiple times. However, attorney Scott Kriss, president and CEO of Kriss Law and Atlantic Closing & Escrow, said his firm performs about 15,000 closings each year and sees defects in titles for new homes as well.
“There might be a mechanic’s lien on the property,” Kriss said. “Those liens follow the land, not the structure. How many contractors and subcontractors worked on the property? One of them might not have been paid and put a lien on it.”
Kriss said that small title defects are fairly common and easy to remedy and that title insurance policies can and do protect buyers from nightmare scenarios.
“Once, we were the closing attorney on this investment property, and the seller moved out of the country,” Kriss said. “They had a second mortgage on the property that was never recorded, so no one knew about it. One day, the new owners walked out the front door to an auction on their front lawn. The title insurer raced down, bought the property at auction, and the owner was saved because he bought that policy.”
Mounzer Aylouche, who is vice president of homeownership programs at MassHousing and doesn’t receive a commission on title insurance policies, recommends them to all home buyers.
“It’s a necessary expense,” Aylouche said. “Think about it like car insurance. You have an expensive asset that you want to protect against unforeseen problems. You’re buying peace of mind.”
He said low-to-moderate income buyers are often eager to avoid buying things that aren’t strictly required, but they need title insurance more than anyone.
“The gateway to wealth is through homeownership,” Aylouche said. “A title problem could hinder them from benefiting from that.”
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