Q: Have you ever heard of “enhanced title”? A friend of mine is buying a home and the title company handling her purchase is offering that to her. I think she should take a pass. What do you think?
A: We’ve written about title insurance many times over the years, and in general, we like it — with some caveats, of course.
When you buy a home, you may not really know for certain that the person selling you the home is the actual owner of the home. You may also not know what liens are attached to the property. But, not knowing can cause some huge problems once you’ve closed on the property.
In some states, the seller is required to pay for and provide an owner’s title insurance policy to ensure that the seller is giving the buyer good title. In others, the buyer is on the hook to obtain and pay for the policy. Title insurance policies can be bought from a title company or through a title agent, settlement agent or closing attorney.
Title insurance’s highest and best use is to protect the buyer from a fraud perpetrated by a fraudulent seller — a person claiming to be the seller but who does not own the home. The second protection is to make sure that all mortgages and liens are paid off at or before closing so that the buyer receives the title to the home free and clear. Prior to closing, the company that issues the policy will give you a document that shows the status of the property’s title as of the day the document is printed. (Hint: Get it as close to the closing date as possible.)
Once you have that preliminary title report, you’ll see the mortgages and other liens that are on the title of the property that you’re buying. At settlement or closing, you’ll need to make sure that all of those items are paid off and removed from title. Once you close, if the property has any other liens or mortgages that pop up later that the title company missed, the title company would be on the hook for clearing that item from title.
In a nutshell, the title insurance policy gives you some peace of mind that once you close, you are the rightful owner of the home, that the only liens on the property should be any new mortgage you took out on the home and any new assessments that are levied by a homeowners association. You also have the opportunity to see what other title matters are on the title to the home you will purchase including easements, homeowner association documents, ordinances, utility rights and many other items.
We recommend that every buyer purchase an owner’s title insurance policy, which is different from the policy you’ll be asked to purchase on behalf of the lender, if you’re getting a mortgage.
Of course, some title companies may offer upgraded coverage, including coverage over building violations, zoning violations, and many other items. This is known as enhanced coverage, and it could add hundreds of dollars to the cost of a normal title insurance policy. From our perspective, we believe that the base American Land Title Association (ALTA) residential policy should be sufficient for most homeowners.
However, you may need to purchase a specific coverage depending on any unique property issues, known as endorsements. For example, let’s say you’re buying a home in a development with private roads and are unsure whether you have the right to travel on those roads forever. The title company may be able to add an endorsement to the policy — at an additional cost — that would give you coverage over that issue.
Any title insurance policy covers the state of the title to a home as of the closing date. It’s like a picture of what your title looks like on the day of the closing. If an easement, mortgage, lien or claim comes up after closing on the home and that item has something to do with actions that occurred after the closing, your title policy won’t cover you. If the seller did something before the closing that clouds your title, by all means give your title insurance company a call.
Post-closing issues could be as simple as real estate taxes that are billed after the closing, association dues that come due after the closing or an easement for a utility company that you grant after the closing. Be sure to ask someone (i.e., the title company, closing attorney or the person helping you in the transaction) to explain what your policy covers.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)