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Plain Language Title Insurance

I am about to purchase my first home. When my sister bought a home, she had problems with a repairman of the previous owner who filed a $2,000.00 mechanic’s lien after her closing. Her title insurance company told her that she wasn’t insured against the lien, but her bank said that it had coverage. How can I try to prevent this from happening to me and make sure that my coverage is as good as my lender’s coverage?

Since few people are able to evaluate real estate titles, they usually hire a title insurance company to do it for them. The title company provides a buyer with a commitment to issue an “owner’s” title insurance policy insuring the buyer against any mistakes the title insurance company may have made.

Your lender also wants you to receive good title, as your home is security for its loan. Your lender will obtain its own “mortgagee’s” title insurance policy from the insurance company. Unfortunately, some homeowners obtain insurance that is inferior to their lender’s. Fortunately, this need not be the case.

A home purchaser must first understand the steps which lead to a title insurance company issuing a policy. Most real estate contracts require the seller to provide a title insurance “commitment” to the buyer prior to closing. This “commitment” obligates the title insurance company to issue a policy after the closing.

In the typical residential sale, the seller is represented by a real estate agent who suggests a particular title insurance company to issue the commitment, handle the closing, and issue both the owner’s and mortgagee’s title insurance policies. Because the real estate agent represents the seller, the agent need not ask for the commitment that best protects the purchaser. Lenders, however, demand a commitment for a policy that eliminates many of the title exceptions which apply in the standard owner’s insurance policy, including the elimination of the exception for mechanic’s liens.

To remedy this, buyers should specify in their contract that the seller is to deliver a commitment for an “owner’s residential/plain language” policy with a “gap” endorsement. Some title companies call this improved protection “Owner’s Extended Coverage.” Title insurance companies usually require a boundary survey, mechanic’s liens affidavits from both the seller and buyer, and in the case of new construction, a certain level of comfort with the builder.

A plain language policy deletes the preprinted exception for mechanic’s liens, most standard exceptions to clear title, and provides other potential benefits to a new owner. The “gap” endorsement guarantees that the title insurance company will issue the buyer a policy after closing, regardless of what liens may appear subsequent to the effective date of the last commitment, but prior to the recording of the deed.

If you are a buyer who has already entered into a contract to purchase a home and the contract does not require these extra coverages, do not fear. Most title insurance companies will issue a plain language commitment and gap protection regardless of whether or not the contract requires them. If the proposed title insurance company will not give you the coverage you want, have your seller find one that will.

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