Lender Requirements and Buyer Protections
When you are buying residential real estate, you are paying money in exchange for title to the property. It is in the interests of the buyer, and the lending institution giving the buyer a mortgage, to make sure that title is clear and “marketable”. The buyer wants to make sure they are actually being buying the property rights as promised by the seller. The lender wants to make sure that the collateral on the mortgage is as promised; the property has marketable title and is clear of other encumbrances, such as mortgages or liens. So, how do the buyer and lender make sure that title is clear and marketable?
The buyer will need to hire a real estate attorney to perform and/or review a title search. A title search reviews the history of the property by looking at the land records. The title search will provide the legal description of the property, showing exactly what the buyer is buying.
For purchases, all conveyances, mortgages, liens and releases are reviewed going back 40 years (called the “chain of title”). By reviewing the title search, the real estate attorney for the buyer will be able to tell if the seller owns the property, how the seller or sellers hold title, do they have the right to sell it, are there any liens or mortgages on the property that must be paid off to make title marketable, and if there are any relevant powers of attorney relating to the property.
The Buyer may also choose to do a municipal search, which reviews all zoning and building permit for compliance with local laws.
For a refinance, only a current owner search is necessary. Through a current owner title search, the real estate attorney performing the refinance closing will be able to see if the borrower is truly the owner, and what mortgages and liens must be paid off to give the new lender first priority.
Lenders are not willing to rely on title searches and attorney opinion when it comes to making sure they have actual collateral when making mortgage loans. Therefore, Title Insurance was invented to cover losses in the case that a title defect is discovered after the closing on the property. Title insurance is available to protect both the Lender and the Buyer from title defects that could result in loss of property value, or even loss of ownership of the property. In Connecticut, real estate attorneys act as title insurance agents and will prepare and secure the policy on the Buyer’s behalf.
For a purchase, the Lender willdemand that the Buyer purchase title insurance to cover the Lender. The Buyer will also have the option to purchase additional coverage that will protect their interest in the property.
For a refinance, the Lender will similarly demand title insurance to cover their interest, but no Buyer policy is necessary. The homeowner will still be covered by the title insurance from their purchase. It should be noted that even if the refinance mortgage lender is the same as the purchase mortgage lender, a new title insurance policy will need to be purchased.
What does title insurance cover?
- Insures against anyone else making a claim that he or she is the owner of all or part of the property;
- Insuresagainst liens or other encumbrances that were missed by the title search or misindexed by the town clerk;
- Can offer protection of ownership even where defects in title marketability exist (such as old unreleased mortgages);
- Insures a legal right of access (though this may be just by foot);
- Insures against violations of government regulations, but only those violations listed on the land records;
- Insures against the exercise of eminent domain in certain situations;
- Insures against fraudulent conveyances in the chain of title;
- Any defect in title that arises from the date of the policy (the closing date) and the date the deed and mortgage are recorded;
- For the Lender, it insures the enforceability of their lien created upon the title of the property by the mortgage;
- For the Lender, it insures the priority of their insured mortgage lien against other liens or encumbrances;
- For the Lender, it insures the priority of their mortgage lien against liens for services, labor or materials for work done on the property (in conjunction with an Owners Affidavit signed by the Seller);
- For the Lender, it insures the assignment and assignability of any mortgages that are assigned to and assumed by the Buyer;
- Pays attorneys fees and costs ofdefending title and the insured mortgages.
There is also available an expanded title insurance policy; which is a good idea for Buyers and may be necessary for the Lender in certain situations. In addition to the protections of a standard title insurance policy, the expanded title insurance policy also covers:
- Correcting or removing existing violations of restrictive covenants;
- The inability to obtain building permits due to existing violation of subdivision regulations;
- Removal of existing structures that were built without proper building permits;
- Removal of existing structures due to non-compliance with zoning laws;
- If the property cannot be used as a single family home due to zoning regulations;
- Removal of an existing structure that is then found to encroach upon the land of a neighbor;
- If a neighbor builds a structure that encroaches upon the property of the insured;
- For one to four family homes that have a valid certificate of occupancy and no recent boundary line changes, offers survey coverage even without a survey.
What does title insurance not cover?
- Government regulations for which a violation was not recorded on the land records;
- Rights of eminent domain where a notice of exercise was not recorded on the land records;
- Defects, liens or encumbrances that:
- were created or agreed to by the insured;
- known by the insured but not disclosed to the title insurance company;
- that do not result in any loss to the insured;
- were created or attached after the date of the policy;
- resulting from the Buyer’s lack of “bona fide purchaser” status.
- For the Lender, enforceability issues created by the Lender’s inability to meet Connecticut business practices requirements;
- For the Lender, enforceability issues created by the Lender’s lack of compliance with consumer protection or truth in lending laws;
- Any liens for services, labor or materials for work performed after the date of policy and not paid for by mortgage proceeds;
- Any claim arising from bankruptcy or other creditors’ rights laws.
How much does title insurance cost?
The cost of title insurance is set by statute and controlled by the legislature. With that said, title insurance premium are set increase beginning January 1, 2016 for the first time in decades.
With that said,we will look at the pricing structure at the time of the writing of this article, even though we are only weeks away from the increase.
Let’s use the example of a house that will cost $200,000 (the amount of Owner coverage) and where the mortgage will be for $170,000 (the amount of Lender coverage). A standard lender title insurance policy will cost $607.00. If the Buyer decides to purchase a standard owner policy in addition to the standard lender policy, the total for both is $750.00. Expanded coverage for both Buyer and Lender would cost $825.00 for both policies. This is money well spent for the Buyer, as the title policy remains in effect untilthe property is sold.
In a refinance, there is no need for an owner policy as the owner is not conveying the property and will be covered by the title insurance policy from their purchase. The Lender policy will need to be purchased to cover the new mortgage, even if the refinance lender is the same as the purchase lender. The good news is that policy is discounted so that a $170,000 lender policy for a refinance would only cost $400.00.
At any time you can get a title insurance quote from the Connecticut Attorneys Title Insurance Company on CATICulator.com.
The Bottom Line on Title Insurance
The title search and title insurance are sometimes unanticipated and unwelcome expenses when the Buyer is presented with their closing costs. However, the Lender policies are required by the mortgage companies and banks, and the Owner policy is a relatively cheap addition that provides a lot of protection. Expanded policies offer buyers the peace of mind that they will not have to incur costs of compliance with violations that were not discovered before the purchase, and even some issues that arise after the purchase. If the Lender MANDATES title insurance to cover its investment, shouldn’t the Buyer similarly protect themselves?