Generally when someone purchases a home, they also purchase a title insurance policy. Why? Title insurance protects buyers and sellers from title defects, fraud, liens or encumbrances, title disputes, or search errors. Title Insurance doesn’t guarantee that these defects don’t exist, but it protects the buyer or seller from being hurt by them. You’re protected from losses in the event of deeds not being recorded correctly, mistakes in legal descriptions, and much more.
But what happens if the buyer builds a new construction home? Is title insurance necessary for a new construction? The answer is yes. Keep reading to find out why.
Building a new home can lead to certain ownership issues detrimental to both the lender and the homeowner. The property was probably owned by someone else before you constructed a home there, and it is necessary to check the ownership to determine any liens and also the boundaries of the property. That said, there can be a lot of hidden issues here related to ownership. The parties involved in a real estate transaction are taking a big risk if there is no title insurance. What type of title insurance do you need if you’re building a new home?
There are two types of title insurance. One protects owners financially and legally, and the other is for lenders. Both owner and lender title insurance are often required to ensure that all parties to the transaction are adequately protected.
To protect their interest in the property until the loan is repaid or refinanced, lenders almost always require borrowers to acquire lenders’ title insurance, also known as a loan policy. It is often tied to the loan’s monetary value, and when you pay down your balance, it gradually decreases as the loan is repaid. While the policy only covers the lender, it gives the buyer some peace of mind, as it often follows a successful property title search.
Owner’s insurance, often called an owner’s policy, is the alternative form of title insurance. It is common for buyers to purchase such insurance to protect against potential future litigation. Owners’ policies are often offered for a one-time price proportional to the amount of the property purchase and are valid for the duration of ownership of the property. Essentially, they offer the assurance that title insurance will provide you with the necessary financial and legal support, should an unforeseen or hidden legal problem arise.
Many buyers make the mistake of assuming that the ownership of the land on which they want to construct a house is clear and undisputed. They assume that the builder has resolved all unresolved ownership issues. In fact, even with a new construction home, issues can certainly arise. Here’s why you’ll need an owner’s policy, and a loan policy (if you’re working with a lender).
Even for newly constructed homes, title insurance serves to protect the lender’s interest in the collateral – your property. Your lender will most likely require you to obtain title insurance before granting the mortgage loan if you are financing a portion of the purchase or building. The owner is not covered by lender title insurance; it only protects the lender.
If a contractor or subcontractor who completed work on the property, or a supplier of items used on the property, has not been paid in full, a contractor’s lien may arise. The property on which the work was done may be subject to a lien filed by the contractor as security for payment. Even if you are purchasing property from a developer who you assume has already conducted a comprehensive title search, it is still required. Even with the most thorough title search, problems and defects can arise after closing that can cost you a lot of money and jeopardize your ownership rights.
If the lien was properly filed prior to closing, the title search will often uncover it. However, there are also cases where a lien is not found. This can occur, for example, when the county clerk makes a mistake and fails to find a properly filed lien. The contractor can file a lien even if the problem is due to such an administrative error.
If the deadline for filing a lien is after the contract has been executed, it may not have been filed yet. Because of this, the lien may not be found during the title search. You would have to pay the cost of removing the contractor’s lien out of your own pocket if you did not purchase title insurance.
Occasionally, a developer will purchase a larger parcel of land and divide it into multiple lots. It is common for the entire parcel to be vulnerable to claims that were not uncovered during the developer’s title search.
All sorts of other title defects can manifest themselves after closing, including:
Title insurance isn’t free. But the premium is much less expensive than the legal fees you would incur to protect your property rights. Owner’s title insurance is in effect as long as you or your heirs own the property. It allows you to transfer ownership of the property to your heirs, knowing that their property rights are fully protected.
Get peace of mind when building your new home with the help of Core. Our title specialists have the real estate expertise and legal knowledge you need to ensure a smooth and easy closing. Contact us today!