Why You Need Title Insurance for Your New Home

At the height of the housing boom in the early 2000s, the Fairfax County, Virginia government was inundated with thousands of new home applications.

In their rush to approve these new communities and meet buyer demand, employees were less than careful with their application examinations, says Helen Krause, marketing director of New World Title and Escrow in McLean, Va.

“Some of the homes that had approved applications and were built exceeded county building height limitations,” says Krause. “Years later, the county government decided to enforce the building height limits and required the owners to either lower their roof or lower their grading to meet those restrictions.”

While there’s no question the owners experienced disruption during the readjustment of their rooflines, Krause says that the owners’ title insurance eased their pain by covering the bills for the process.

Some buyers of newly built homes may assume that because they’re buying a home that no one else has ever owned, title issues shouldn’t be a problem. However, Diane Evans, president of the American Land Title Association (ALTA) and vice president of Land Title Guarantee Co. in Denver, Colo., says title insurance is critically important to buyers of both new and resale homes.

Potential Title Issues

Evans says some of the more common potential title problems with newly built homes are related to the legal ownership of the land on which your home is built and to mechanic’s liens.

“In a brand new subdivision, you need to make sure the land was properly subdivided and that your home is on the correctly identified lot in the subdivision so that there’s no question of ownership in the future,” says Evans.

Krause explains that while your house is new, the land it’s built on is not, so it’s possible to have a third party make a claim on the property. She says that the first owner can be more at risk for title defects than subsequent owners because it’s the first time the title has been reviewed since the land was purchased. For example, a piece of land owned by multiple family members may have been sold to the builder without the permission of one of the owners; that owner can make an unexpected title claim if they didn’t initially know about the sale.

Lender’s Insurance and Owner’s Insurance

If you are financing your purchase, your lender will require you to purchase lender’s title insurance that actually covers the lender’s investment in your property, says Evans.

“In most states, someone who provided a service or materials to build your home and is waiting to be paid will have a higher priority over your home than your lender, so the lender wants to make sure that any possible liens are covered by an insurance policy,” says Evans. “That person could request a foreclosure on your property in order to get paid, so your lender is just making sure that you and your home and their investment in your home are protected.”

Title insurance regulations and practices vary from one state to another. Evans says that owner’s title insurance is optional in some states. In some areas, it’s common for the buyers to purchase this insurance policy; in others, it’s more common for sellers to purchase it.

Owner’s Insurance — Standard or Enhanced

Buyers can opt for either standard or enhanced owners’ title insurance. Basic coverage, says Evans, insures your ownership and identifies any restrictions on your use of the property.

“The enhanced insurance provides additional coverage beyond the basic level for potential problems like zoning violations or builder permit violations,” says Krause.

Enhanced coverage also protects you against disputes over fences, unpaid mechanic’s liens and mineral rights that could impact your property. “Most people purchase owners’ title insurance even when they’re buying a newly built home,” says Krause.

Unlike other ongoing expenses of homeownership, title insurance is paid with a one-time premium at the settlement.

“Title problems are rare but terrible, so if you have an insurance policy you can feel confident that not only will the policy cover an attorney’s research and court costs, it will also pay any back loans or liens if they are legitimate,” says Krause. “The title insurance company will handle the entire issue without having to charge you anything once you’ve paid that initial premium.”

Title Insurance Shopping Tips

Many builders offer incentives to buyers who work with their preferred title company to settle their transaction, but Evans suggests that even if you eventually choose to work with the preferred company, you should shop around to make sure you are working with a company that offers the best rates and excellent customer service. She offers the following shopping tips for buyers of newly built homes:

Ask a real estate professional such as a lender or Realtor for a recommendation.

“Most consumers only buy one or two homes in their lifetime and won’t have much experience with a title company,” says Evans. “”Professionals in the business can share their expertise with you and recommend a company that provides good service.”

Check with your state insurance regulator.

Each state has information about licensed title companies and complaints against a title company. The www.ALTA.org website also has resources about their members for consumers who want to find a title company in their area.

Builder recommendations are usually valuable.

“Builders don’t want to put their company at risk, so they’re likely to work with a good title company,” says Evans.

Shopping is about more than price.

“Price alone isn’t the best way to make a choice,” says Evans. “You want to make sure the company has the processes and procedures in place to record your documents legally and immediately. You also want to choose a company that you know will be in business for the long-term.”