In my last article I discussed some of the key elements of title like the settlement statement (CD) and the title commitment (PR). Go back and read that article if you haven’t already. In this article I will cover the three types of insurance policies.
There are two policies that protect the new owner and one policy (essentially) for lenders. The two owner policies are the Alta Homeowner’s policy and the Standard policy. The Homeowner’s policy is the default policy provided on almost all retail transactions and covers the most things. It is also more expensive than the Standard. For a complete review of coverage, ask your escrow officer for a sample policy or list of coverages and exclusions.
Some of the important things the Homeowner’s policy covers that the Standard does not are boundary lines (fences and shrubs in the wrong place), adverse possession (when a neighbor encroaches on your property without you knowing it), unrecorded easements (like a right of way or access) and mechanic’s liens. These are the most common problems that you will find affecting your property. So, I do recommend the Homeowner’s policy to protect you. But you can opt for the Standard and add on whatever additional coverages by endorsements that you think you might need.
The premium (cost) for both these are based on the purchase price of the property and insures you up to that amount.
The Lender’s policy insures the lender for the amount of her loan. If there are title defects that affect the value of the property such that a lender couldn’t enforce her mortgage, the insurance kicks in to cover any losses. It does not protect the lender if the market value declines or if the property is destroyed in a fire or flood. That is your home casualty and liability insurance you get from your insurance agency.
The premium for the Lender’s policy is based on the amount of the loan. Almost all lenders will require a Lender’s policy as a condition of providing the loan.
Who pays for the policies varies state-by-state. Often, the current owner (seller) will pay for the Homeowner’s policy because it ensures the new buyer and the prevents lawsuits against the seller for title defects. And typically, the buyer will pay for the Lender’s policy because he is getting the loan. But this can be arranged differently by putting the terms into your contract.
Choosing a policy is very important for investors because investors often buy property in business entities. And what you have to know is that the Homeowner’s policy does NOT cover entities like LLCs or trusts! So, if you’re not working with an experienced title company, they will issue you an Owner’s policy because it does cover entities. And they probably won’t even tell you. But now you are not getting the best coverage.
But this is not problem. You can ask your title company to provide an endorsement to the Homeowner’s policy to name your LLC (or trust) as an additional insured. Now, how this is actually done is up to the underwriter your title company uses. They may have a slightly different process or endorsement. So, just ask your escrow officer how to accomplish this.
Another issue that arises with choosing the right policy is when you are buying a property with conventional financing (a typical bank loan). This looks like a retail transaction because you will have to buy the house in your personal name (bank requirement) and your title company will automatically provide you with the Homeowner’s policy. But, as we just said, that policy does not cover LLCs and you will want to put this property into your LLC after closing for asset protection or tax purposes. Thus, doing so will void your insurance.
There’s an answer for this as well. Work with an experienced title company and let them take care it. Or explain to your escrow officer that you will be deeding the property to you LLC after you close on it (in fact, your title company should help you with that any way) and you need to make sure that your LLC will also be covered. They will issue the correct policy and any endorsements that you need to cover your LLC and provide additional coverages if you want them.
Remember, that knowledge is POWER! The more you know about title and title insurance, the more you’ll save and be protected!
Next month I’ll cover title to property and common title issues that you’ll run into and how to make your title closing smooth and easy.
Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180