What Is Title Insurance and Why Does A Homeowner Need It?

I get it. There are so many costs with buying a home. Wouldn't it be easy to just skip out on buying title insurance? Besides, you're probably not going to need it anyway, right?

Well, unless you're a psychic, I would strongly suggest you re-think that.

What if this happened to you:

When you bought a home, the seller had both a first and second mortgage on it. Both were paid off at closing but the seller forgot to close out the second mortgage, which was a line of credit for him.

The seller continues to use that line of credit, but he doesn't pay on the loan. Guess who gets stuck with paying that honking bill?

Or, suppose one day, a woman comes knocking on your door and tells you in no uncertain terms that you're living in her house. She can prove it and you need to pack your bags.

Shocked, you tell her she's crazy, and then call your attorney.  Turns out the woman and her husband split up shortly before the house was sold. He forged her name on the deed and the sale of the home was actually invalid.

And guess what? You DO have to move.

These are just two scenarios that have happened. Needless to say, people don't always act in YOUR best interest. That's why it's important to protect the largest material investment of your life.

"But My Home Is New. Why Do I Need Title Insurance?"

That's a great question. People often think that since they are the first homeowners of a piece of real estate, they don't need title insurance.

Consider this. The builder most likely had a construction loan on the house. Those loans are often released in groups of 10 lots at a time. So it's quite possible that the bank has an interest in your new home title.

The property you're buying was master planned for multi-family use, but was not yet zoned. Previously, it had been a family farm. Someone's home place. When the title work was done, it was discovered that one of the 10 children still had 10% interest in the property.  The property had been conveyed by will to the mother's three sons.

If you don't have title insurance in this situation, it's not going to be pretty, legally.

Title insurance prevents the current property owner from suffering financial loss while he or she owns the property.

If a title claim is placed against your property, your title company will go to court for you, as long as it is one of the many "common" title insurance claims.

As a prospective homeowner, you do not have to buy homeowner title insurance. That's your right. However, your bank requires you to buy their title insurance. (These people aren't stupid. They've been at this a long time.)

The bank is going to protect their interests. They really don't care about yours. That's why you must be proactive and protect yourself!



Lilly Title & Settlement is a full service title insurance and settlement agency located in Staunton, VA.

Should You Shop Mortgage Lenders?

Unless you have a strong relationship with a banker, shopping for mortgage rates is always a good idea.

You'll own the home for many years, and you want to make sure you get the best mortgage interest rates possible.

As I discussed in my previous post on closing costs, rates vary depending on the lender and the type of house you're buying.

So just like buying a car or small appliance, you want to check around.

However, there are a few things you need to be aware of.

"No Closing Costs" Loan

You've seen them, right? They are very enticing especially if you are a first time home buyer struggling to get cash together to buy your home.

All I can say is beware. For some, it may be the entrance fee you have to pay to become a homeowner, and that's okay.  My advice is to know what you're getting into first, though.

No closing costs loans generally have higher interest rates on the cost of closing your transaction or on the mortgage loan. If you go this route, make sure you're not planning to stay in the home for a long time. Otherwise, you'll end up paying a ton of interest over the life of the loan.

When you reach the final phase of home buying, your lender must provide you with a breakdown of closing costs three days prior to closing. This is a document that is five pages in length with all the finalized terms.

The long and the short of it is this: Estimating your closing costs and budgeting accordingly goes a long way to ensure that you're looking at homes you can afford. Otherwise, you're going to spend a lot more in mortgage interest over the life of the loan than you would have paid in closing costs!

One caveat. Whatever you do, make sure you include title insurance as part of your real estate transaction. It is optional for homeowners but banks require you to pay their portion. (They aren't stupid.)

Homeowner title insurance is a one-time insurance payment that will give you peace of mind for as long as you own the home.

How Do I Estimate Closing Costs?

It’s a bugaboo, for sure. There’s so much involved when buying a home, and if you’re buying a home for the first time, it can seem overwhelming.

It’s frustrating to save for a down payment only to realize that there’s STILL more money you need to have before you can move into your dream home.

Let’s break down this monster under the bed and find out what he’s made of.

Closing costs, or the fees involved in transferring ownership from one party to the next, can vary depending on the kind of house you buy and the type of loan. Generally speaking, though, closing costs are between 2%-5% of the value of the home.

So on a home that’s selling for $200,000, you could pay anywhere from $4,000-$10,000. That’s a chunk of change!

What are those fees?

Inspections—You’ll probably want to hire a home inspector before closing the deal on your new home. Why? To make sure the home isn’t in need of any major repairs. You’ll also want to check for termites, and other wood boring pests, too. Many lenders require that you get a termite inspection, but if your lender doesn’t, get one anyway!

Survey—Not all, but many states require you to hire a surveyor to verify that the deed is correct with the lot size. The state of Virginia certainly does. So you'll have to budget for that.

Loan Origination Fee—To handle your real estate transaction, most mortgage lenders, brokers, or banks charge about 1%, sometimes less.

Attorney’s Fees—Ah, attorneys! Where would we be without them? In this case, lawyers prepare and review various legal documents in preparation for closing.

Property Taxes—Usually the buyer has to pay several months’ worth of property taxes at the time of closing.

Title Insurance—Title insurance is a one-time insurance fee that protects your home from unknown fraudulent transactions. The title to the property is fully researched for errors, liens, unpaid taxes, etc. The errors that are found must be corrected before the transaction can be closed. Title insurance also protects your home from what cannot be seen. For example, a former owner claims to have title to the property because her name was forged on legal documents. Title insurance protects you against these kinds of claims. Don’t even think about not getting it!

I’d love to tell you that these fees are the full extent of your closing costs, but they aren’t.  There could be more. However, these are the main fees. The Consumer Financial Protection Bureau has an interactive example of closing costs, which is very helpful.

You’ll  also need to talk with your loan officer to find out the full range of costs for your situation.

If you'd like to learn more about title insurance and real estate closings, go to our website: www.lillytitle.com