Why you need it before you close
You may have secured a mortgage for your new home at a good rate, had an inspector give it a clean bill of health, and gotten over any buyer’s remorse about taking on your new big investment.
Time for a sigh of relief? Not yet. The last thing you want to do is spend more money on something you can’t see, but if you didn’t have a title search on your new home, it’s important you have title insurance before you close. Insurance can be costly, but as most of us know because of automobile, health, and home insurance, it’s more costly not to have it in place when it’s needed.
A title search prior to closing can allow you to walk away from the deal if the search reveals an intractable title problem, says attorney David Reiss, a professor of law and Academic Program Director, Center for Urban Business Entrepreneurship, at Brooklyn Law School in Brooklyn, N.Y. After the closing, title insurance will take care of any claims that are covered by the policy such as those relating to contractor or mechanics liens, unpaid mortgages, encroachments, or easements that affect your ownership of the property.
Truth be told, most buyers don’t purchase a home by paying cash, they turn to a mortgage lender or bank. And most lenders require a title search and insurance to protect their investment, Reiss says. Certain types of house purchases may make it difficult, however, to conduct the search and buy the insurance, namely a home purchased after a foreclosure or through a court sale, he says.
Without title insurance, the result can be hundreds, if not thousands, of dollars, if there are balances owed on prior mortgages, unpaid taxes, and liens that nobody knew about at the closing table, says Ben Niernberg, EVP of Business Development & Operations at Northbrook, Ill.-based Proper Title, LLC. "The insurance guarantees the deed to the home is being sold by the correct person so no one else can claim it," he says.
In fact, it may be wise to order a search as soon as possible to avoid having problems at the 11th hour. The buyer should make the purchase contingent on a clean title search, Reiss says. The process of conducting a search is straightforward. An agent of the title insurance company will search the public records related to the house and property, including land records, judgment liens, and violations to see if any there are any title defects, Reiss says.
The time table to correct an issue varies according to the issue, and some can be rectified in an hour while others take weeks or months, Niernberg says. Easement issues typically are corrected fairly quickly while mechanics liens may prove difficult and time consuming, he says. If issues arise with deeds connected to wills or deaths, these, too, may take time and again, another reason to do the search before closing, Niernberg says.
The cost of conducting a title search and buying the insurance policy vary by state, but should never be a deterrent, given the enormity of most home purchase investments. In Illinois, for example, the fee to conduct the search is $250, which covers any outstanding liens or other potential claims on the property. (A chain of title that searches back to the last known title policy is usually about $250.00, Niernberg says.)
The largest cost of this process is buying the actual policy or title insurance. The amount is not a percentage of the value of the house, but determined by the underwriter based on a number of variables, the same as with insurance policies for cars, health, or the home. With title, this involves the sales price. A policy on a $350,000 home might be $1,995, for example, or $2,340 for a $500,000 home, says Niernberg.
But once you have the title policy in hand, you finally can heave a big sigh of relief.