For first-time homeowners, the costs associated with buying a home can be an unpleasant surprise. You may already have expected to pay a large deposit and deal with monthly mortgage payments, but that is really only the very beginning of the costs that will quickly start to pile up, if you’re not as careful as can be. A very big one that will hit you right away and chances are that you did not know to consider them, is closing costs. These are expenses for legal fees and transfer fees, among other things, that you have to pay upfront.
Unfortunately, the extra expenses don’t end there. Not by a long shot. You may have heard about title insurance, but how does it differ from homeowners insurance? Do you really need it?
Here’s what you need to know:
Let’s begin by determining what title insurance is not. In short, it has nothing whatsoever to do with homeowners insurance, which is an entirely separate thing. You need homeowners insurance (or renters insurance in NYC if you do not own your home) to protect your home in case of damage or theft. Even if you’re living in the safest parts of NYC, you still need this kind of insurance, as crime is always a threat and your home may be damaged by fire or other perils.
Homeowners insurance will cover the costs of repairing or rebuilding your home, as well as the costs of the contents stolen or destroyed. It’s absolutely essential that every person who ever owns a home has some level of homeowners insurance to cover them if something unforeseen happens – because, owning a home basically comes with the guarantee that things can go wrong and you don’t want to be caught with a gigantic bill with no insurance to save you.
For most people, though, this homeowners insurance will seem like more than enough. Surely homeowners insurance should cover you for any real problems that may arise. However, that’s not the case. Homeowners insurance covers a lot, but it simply does not cover any of the same costs covered by title insurance.
When you buy a home, what you are really buying is the title. When transfer goes through, you will receive ownership of the title. This is basically the right to own and use your property with all legalities in place. It is passed to you from the previous owner, who obviously held the title before you. A big part of the reason why house ownership is done through the
passing of title deeds is that the previous owner must have full legal access to the title of the home in order to sell it. There are checks done in order to ensure that the title is valid.
But there is always a chance that something is not quite right. Whether this is due to a clerical error made years ago or intentional fraud, it can leave you in quite a bit of trouble. If the problems with the title render the seller’s ownership invalid, your ownership will be invalid as well. This can cause major legal proceedings that will cost you a whole lot of time and money.
Here are some of the common problems found in the title of homes:
Any one of these issues could lead to financial loss. Loss may range from diminished value of the property (as in the case that third parties have the legal right to use it) to the retroactive invalidation of the sale. The latter is the worst case scenario as you may or may not get your money back but you will be down an entire home. You need to do what you possibly can to avoid this happening at all possible costs.
Title insurance is exactly the type of insurance that covers the losses, both in terms of lost value and legal fees in dealing with the ensuing issues, that might come with a faulty title deed. There are, however, two main types of title insurance: lender’s title insurance and owner’s title insurance.
Most lenders who are responsible for the repayment of their loans given require borrowers to get title insurance. So as to protect the lender in case the property is repossessed through no fault of the owner. This makes sense as it could leave them out of hundreds of thousands of dollars and no real opportunity to get their money back.
Owners, though, are not required to get owner’s title insurance but it is very highly recommended. While lender’s title insurance will pay the lender out in case you cannot, owner’s title insurance will cover your losses should your title be invalidated, which are certainly bound to not be insignificant. Between a loss of a sale and steep legal fees, the invalidation of title deeds can leave you not just broke but massively in debt.
The good news is that title insurance rates are standard across most companies. So you don’t have to go around hunting for the best rates. In NYC, for example, they usually amount to 0.4% to 0.5% of the purchase price of the property. They essentially become part of the other closing costs you need to pay out upfront.
So, with all of this in mind, should you get title insurance when you buy a new house? Chances are you’ll need to get a lender’s title insurance, but owner’s title insurance is up to you. If you are confident in the validity of the title of your new home, you can choose to forgo
it, but it’s highly recommended that you do not do so, certainly for at least the first few months of taking ownership of your new home.