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There are many things to keep track of when you are purchasing a home. These include ensuring you have an adequate deposit, your finances are in order, and that you can pass muster with a strict co-op board. You may have even considered homeowners insurance, which protects you against damage to your property, and liability for injuries to others, that your lender will require.
However, you may not have considered title insurance, which you will also need to satisfy your lender. It may seem arcane, but you are required to have it at closing, which makes it worthwhile to understand what you are purchasing and how it provides protection.
Image by Laframboise Covenant / Flickr
What is title insurance?
In real estate, the title shows that you are the lawful owner and have the right to use the property. A deed is a legal document used to transfer ownership from one party to the other. This seems easy, but there is a myriad of issues that can come up, and this where title insurance comes in.
You need to purchase title insurance for yourself (owner’s policy), and you are also generally responsible for your lender (lender’s policy). Naturally, this protects you, and your bank wants to ensure that it receives the outstanding mortgage balance.
Title insurance is a bit unusual since the insurance protects you and your lender from past events before your ownership (and undertaken by others), as opposed to most other types of insurance (e.g. auto, medical, life).
The premium payment is due at closing, and it is a one-time fee.
The title insurance company or your lawyer typically conducts a title search while you are waiting to close. This helps determine that the seller has a clear title to the property and can legally sell it to you. The process involves searching the history of ownership, determining the property tax status, and checking if there are any judgments or liens against the property.
Once this is completed, the title insurance is willing to underwrite title insurance. Since this search was presumably exhaustive, you may think this is unnecessary. However, there is the risk that something was missed (i.e. a defect in the title) or a situation from the past my crop up and someone may seek to sue. These defects may include someone claiming ownership, liens, and improperly recorded documents. For instance, you may purchase the apartment from an individual, only to have an ex-spouse make a claim. Title insurance covers the legal cost to defend you and compensates you should you fall on the losing end of the claim.
A regulated market
You are likely to get a wide range of costs paid for title insurance if you ask friends and family outside of New York. The Department of Financial Services licenses title insurers, and the agency approves the rates, in New York State.
This is the list of title insurers licensed in New York State. Fidelity National Title Insurance and First American Title have the large market share in the state. You can also receive a recommendation from your real estate agent or lawyer.
This may seem like an insurance company, or your lender is trying to gouge you, given the low likelihood of a claim. However, it is worth remembering that the relatively modest cost provides a lot of protection, up to the market value of your home.