Tag Archives: title insurance

Same Name, So Many Types

Insurance … that covers a lot of area – from car insurance and liability insurance to health insurance and homeowner’s insurance.  There are a lot of insurance types out there and when you buy a house, there are a few you need to be familiar with.

My previous post discussed mortgage insurance.  This type of insurance may be required on your loan if you have less than 20% down with conventional financing or if you’re doing FHA financing.  It insures the lender in case you default and doesn’t cover you for anything.  Mortgage insurance is factored into your monthly house payment.

Flood insurance is another one that could possibly become something you need to understand.  Lenders will “pull” a FEMA (Federal Emergency Management Agency) flood certificate on all properties prior to financing them to confirm the house is not in a flood zone.  If it is in a flood zone, flood insurance will be required to be part of your house payment.

Title insurance is necessary for any loan that is being done in Minnesota.  There are two types of title insurance.  One is called lender’s title insurance which insures the lender in case any other liens come up against the property.  As lenders, we want to be in first lien position so if other liens arise, we are paid first.  Lender’s title insurance is paid by the buyer at the time of closing and the amount varies by title company, loan amount and purchase price.

The second title insurance out there is called owner’s title insurance and this would protect you.  It is optional and the cost is based on purchase price and loan amount, as well as the title company you’re using.  This is a one time fee paid by you at closing, so it’s not something that is “renewed” year after year.

Though you aren’t in a lien position, you may want to be protected if liens come up that weren’t incurred by you. When purchasing a home, one of the jobs of the title company is to search public records on the address you’re buying.  They want to make sure no liens exist so they can pass free and clear title to you.  If there are liens, the seller is responsible to pay these off at closing.  No one is perfect, so there could be liens out there that the title company doesn’t find as they may be improperly recorded at the county.  Liens follow the property address, not the person who incurred them.  So, when you go to sell or refinance and a new search is done, something could come up like this and you would either need to pay it off, go to court to fight the lien if it’s not yours or when you purchased, if you had bought the owner’s policy, you may be protected for instances like this.  Talking to a title company is the best way to learn more about the owner’s policy and their specific coverages.

Finally, there is homeowner’s insurance.  This is a little confusing because it actually is known by a few other names – hazard and property.  They all do the same thing – insure the property we will be lending on.  And lenders want to make sure the property is adequately insured.  The amount of coverage requirement will vary by lender and loan type so you will want to check with your lending institution.

Homeowner’s insurance is billed annually, and in many instances, will be part of your house payment depending on the loan type you’re doing and your down payment amount. It’s your responsibility to set up your annual policy with an insurance agent of your choice prior to closing.  The amount they charge will be part of your payment, and if you escrow your insurance in your payment, the renewals will be paid by the lender in the future on your behalf.  This annual premium amount is broken down to a monthly amount and added to your house payment.

What if you purchase a townhome or condo and the insurance is covered in your association dues? Do you need homeowner’s insurance in that instance?  The answer to this varies.  Most associations have insurance that covers the structure, so if it were to have damage, their coverage would insure that loss.  However, these policies don’t always cover cupboards, carpet, bathroom fixtures, etc., also known as “walls-in” or “all-in” coverage.  If they don’t have this, then you would need to purchase this policy, typically called an HO-6 policy and it would be included in your payment if the loan type you’re doing requires this.  If “walls-in” or “all-in” is part of their policy, then you wouldn’t need it for loan purposes, BUT, you will still want to purchase it to protect your personal belongings!

As you can see, when it comes to buying a home, there are a lot of insurance types to be familiar with. It can get a little confusing.  Hopefully, you will work with a lender that will help educate you on the requirements specific to your loan type.  As with ALL insurance related questions, please reach out to the appropriate provider or expert to answer questions you might have for your situation.

Confused Over Insurance?

Insurance is necessary.  Let’s face it, things happen and it’s best to be prepared.  There is life insurance,  health insurance, car insurance, renter’s insurance,  insurance for our pets and we even have insurance for the gadgets we buy.  Insurance is big business because you’re paying for the “what ifs” that occur.  I certainly hope you never have to use insurance, but you’re always thankful when you have it.

As a homeowner, or soon to be homeowner, there are many types of insurance and they can be a little confusing.  Let’s examine insurance types the lender will require you to have in order to obtain financing.

ID-100259033Hazard insurance — also known as homeowner’s insurance or property insurance.  This will insure you against loss or damage to your home.  Lender’s require that you carry insurance for as long as you have a loan, though continuing to insure your home, as long as you own it, is advised.  The property serves as security for the loan and the lender wants to protect this security.  In most instances, your insurance will be included as part of your monthly house payment, but the insurance agent is your choice.  The benefit of this insurance is not only to protect your home, but it also protects your personal belongings (to what extent will be determined by your policy).

Private Mortgage Insurance — also known as PMI or mortgage insurance.  If you have less than 20% down using conventional financing, the lender can require that you carry mortgage insurance.  I say “can” as there are a few first time buyer programs that don’t require this insurance even with less than 20% down.  Unfortunately, this insurance does nothing for you.  It insures the lender in case you default on your loan.  The lender will choose the mortgage insurance company, though most PMI companies are priced similarily.  At some point, you may be able to remove this insurance from your monthly payment, if you meet certain requirements.

FHA loans always have mortgage insurance.  This is NOT PMI as it is not purchased through a private company.  FHA insures their own loans and the insurance is required on all FHA loans regardless of how much you provide for a down payment.  This also insures the lender in case of default and is included in your house payment.  The insurance will remain on the loan for the entire term of the loan when you take out a 30-year loan.

Flood insurance is another type of insurance the lender may require; however,  the chances that you need this are slim to none.  All lenders require a flood certification to prove the home they’re financing is NOT in a flood zone.  If it is in a flood zone, the lender will require you to carry flood insurance on the home.  This will also be part of your monthly payment, if required.

Title insurance — lender’s policy and owner’s policy.  The lender’s policy is required to be purchased on all transactions in MN.  The cost of this is determined by the title company with whom you close.  It insures the lender that they always have first lien position to the property, even if another lien comes up against the home. The owner’s policy is optional to purchase.  It is very inexpensive insurance and is highly recommended.

Insurance is complicated, yet necessary, and there are countless options.  The more you understand the options and requirements  that are available, the better you’ll understand the process of buying your home!

*Image courtesy of Stuart Miles – freedigitalphotos.net

Tips & Tidbits: Let Me Introduce the Cheapest Insurance Out There …

If you’re in the loan process right now, your head is probably spinning with all the new information.  Throw in there a lot of references to insurance — insurance for the home (aka hazard insurance), for the mortgage company (aka PMI or MI) and title insurance.  Oh, and to confuse the matter more, you can actually purchase mortgage insurance on your loan (in case something happens to you, the loan will be paid).  What the heck is the deal with all these insurances and what is really protecting you?

I am so glad you asked.  Let’s just start with some explanatory definitions, then I will get to the meat of this.  Homeowner’s Insurance is insurance that covers your home and the contents in case of a catastrophe or burglary.  As lenders, your house is our collateral.  If something should happen to it, we want to make sure you have enough coverage to replace your home.  This is a policy you purchase with your current insurance agent or one I could refer you to.

If you were to buy a townhome or condo, you may not need this type of insurance.  In most instances the homeowner’s association covers that with the owner’s association dues.  There are some changes that have occurred with investors in regards to requiring a separate policy.  If the association’s insurance policy only covers “studs out”, then you would need to buy a special policy called a HO-6 — basically, this will cover the “studs in”, which means, all your personal belongings along with cupboards, fixtures and appliances.  If the association does have the extra coverage, it is still advisable for you to get the HO-6 policy (just won’t be as expensive) to cover your personal belongings.  In this instance, proof of this would NOT be required at closing.

How about the “dreaded” Private Mortgage Insurance (PMI) on conventional loans or Up-Front Mortgage Insurance (UFMIP) with FHA?  First of all, it’s not something to dread; it’s reality.  And in this day and time with all the private mortgage insurance companies that had to pay on claims due to foreclosure, it will never go away.  In a positive light, it allows you to do a minimum down program.  Anyway, the purpose for mortgage insurance is to insure the lender in case of default.  You remember AIG???  Who couldn’t forget the insurance  company that was bailed out … a few times, right?  They insured a lot of the high risk loans that were done in the past years.  No wonder it’s harder to get this type of insurance.  Only in the last few months have the PMI companies “let loose” a little to do 3% loans.  UFMIP is for FHA loans.  FHA is self-insured.  They have an up-front amount that is financed into your loan amount, as well as a monthly amount for insurance — which is lower than conventional insurance.

Last, at least the last I intend to address, is Title Insurance.  This is the CHEAPEST insurance you will ever purchase.  There are two types of title insurance — lender’s and owner’s.  The lender’s policy is required to be purchased to insure the lender that they are in first lien position.  One of the title company’s jobs is to search public records at the county to check for any liens.  The title company can only find what is correctly recorded.  You have the  option to purchase a  policy for yourself, called an owner’s policy.  This protects YOU in the event any liens were to appear against the property that you didn’t incur.  For instance, let’s say that a few owners ago, a new roof was put on the home and the owners didn’t pay the contractor.  In order for the contractor to make sure he gets paid, he placed a lien against the home YOU’RE purchasing.  If recorded correctly, the title company will find this and require the seller to pay it off to give you free and clear title.  If, however, someone made a mistake at the county, then it may not show up.  Bummer deal is liens follow the address, NOT the person who incurred them.  Five years later you decide to sell and wah-la, a $5000 lien appears.  Hmmm — what to do?  You have a few options — pay it (cheerfully I’m sure 😀 ), go to court to fight it or … drum roll please … at closing when you purchased your home, you purchased owner’s title insurance.  With this insurance, you pay ONCE, at closing, and it covers you for the ENTIRE time you own your home.  This insurance depends on the loan amount and sale price, but for first time buyers, it won’t be much more than $200 or so.  Paying just $200 to save $4000.  No brainer.  The two real estate attorneys I trust would NEVER let their clients close without it.  They spend way too much time fighting in court for other clients that don’t have the insurance.  Unpaid work is just an example of a type of lien, but there are more “opportunities” to have to use it — heirs to a property, divorce situation, many things that may put a  person in title to the home YOU own.

The long and short — there are many types of insurance during this process.  The only one you have the CHOICE to purchase is the owner’s title insurance.  It’s a necessary, but cheap, evil and well worth the investment.  Just do it!