There are various types of insurance which are frequently purchased in connection with the acquisition of real estate, some of which are often required by lenders as a condition of the loan. You may also wish to purchase insurance to protect your interests. Below is a list of these types of insurance and a discussion of their purposes.
Homeowner's Insurance: This can protect both the lender's interest and your interest. The coverage afforded by the homeowner's policy includes: personal liability; theft; and hazard protection other than flood. The bank will usually require coverage equal to the amount of the loan. To protect your interest, coverage should at least be equal to the replacement value of the house. The bank will in most instances require proof of payment of the first year's premium, along with a copy of the policy at the time of closing.
Title Insurance: Separate policies are available to protect the lender's interest and your interest. Coverage afforded by title insurance is different to each of the insureds based upon their interests in the title. The lender will receive coverage based upon its mortgagee interest in the property. The amount of coverage is based upon the amount of the loan.
You, as owner can also receive coverage based upon your interest in the property. A complete discussion of an owner title insurance policy is covered elsewhere in this summary.
The one time premium for title insurance is paid at the time of closing. The lender will require a policy to cover the amount of the loan and, if the loan involves negative amortization, may also ask to be insured for a specific amount over the initial amount of the loan.
Coverage on the owner policy should be equal to the fair market value of the property. Virtually every lender in Connecticut requires title insurance. The expense is borne by the borrower.
Demolition Insurance: If the house you are purchasing is found to be non-conforming to the town's zoning regulations, the lender may require you to obtain demolition insurance. In the unlikely event your house is partially destroyed by fire or some other disaster, the town may require that you remove the building rather than repair it. This insurance will cover the "taking down" of the remainder of the building.
Private Mortgage Insurance (PMI): This type of insurance protects the lender against loss due to default by the borrower. It is generally required whenever the loan amount exceeds 80% of the fair market value of the property being purchased and may also be required in other instances. The requirement for this insurance is usually waived after the loan has been reduced to a specific level. The first year's premium may be required to be paid on the day of closing.
In some instances, the bank may require that you purchase additional insurance to protect against specific hazards.
Flood Insurance: If the property being purchased has a building or other structure located in an area subject to flooding, federal law prohibits the lender from making any loan secured by a mortgage on the property unless the borrower purchases flood insurance. This insurance must be reviewed annually (but can be paid up to three years in advance) and is usually purchased in an amount equal to the loan. The program for flood insurance is sponsored by the federal government.
There are many miscellaneous, ongoing expenses associated with home ownership. Such expenses may include one or more of the following: real property taxes, sewer assessments, fire district taxes, water, heating oil, common expense assessment(for condominiums), etc. It is likely that a seller will have paid some of these items in advance, covering a period of time that extends past the date of closing, i.e., the date of transfer of title. Therefore, adjustments will be made to reimburse the seller for expenses paid in advance i.e., that will relate to a period of the buyers' ownership of the property. Many of these items have different payment periods.
There will also be instances when items are not payable until after the period of use or service has past. In that event, the seller will reimburse the buyers for expenses the buyers will incur after the closing which relate back to miscellaneous expenses that may have been negotiated between the parties during the pre-closing period. For instance, the seller may agree to do some repair on the house or substitute an additional item (such as a fixture) in lieu of having to do repairs, or there may be an agreement to reimburse the buyers for the cost of having the repairs completed after the buyers take ownership. All of these arrangements or agreements should be reported to me prior to the closing in order that they can be included in the financial calculations and adjustments that I prepare prior to the closing.
Title insurance provides protection against financial loss which could result from title defects or claims against your property. There are two types of policies: the owner policy, which provides protection to the homeowner and the homeowner's heirs, and the mortgagee policy which offers protection to the mortgagee (lender) and its assigns. These two policies are separate and distinct. If the lender requires title insurance (which is usually paid for by the buyer), it is the lender who is insured and not the owner. If the owner wishes title insurance, a separate policy must be purchased. The new owner can, however, reduce the cost by purchasing the two policies simultaneously. For example, when an owner policy is purchased from the title company, there is no additional charge for a policy insuring the lender's interest provided it does not exceed the amount of the owner's coverage.
Title insurance offers two types of coverage. First, it will pay to defend the insured's title in a court of law, and secondly, it will pay the cost to remove a defect in title on behalf of the insured to the extent of the policy limits.
Purchasers of property are correct when they assume that their attorney's examination of the title to the premises and receipt of a warranty deed from the seller are generally sufficient to guarantee that they will have good title to the property.
However, title insurance provides two additional protections. First, if there is a problem, it is the title insurance company and not the new owner who will have to assume the financial burden of mailing a claim against the prior owner. Second, there are a number of "hidden defects" which neither the seller nor the attorney examining the title are responsible for but which could affect your title. Examples of these are lost or forged deeds, deeds executed by incompetents, incorrectly indexed deeds, or improperly probated wills. Title insurance covers all such potential problems and does so without respect to the financial resources of the attorney or the prior owner.
The title insurance policy or policies are issued at the time of closing. There is a one time premium payable at closing by the buyer. Protection begins immediately upon the recording of the appropriate documents and works backward in time. That is to say that, any defects which occurred prior to your closing, will be insured by the policy. Those things affecting title which occur after the time of your closing would not be covered, unless, of course, they were based on some defect in the title which existed prior to the time the insured lender or owner acquired an interest in the property. There are specific exclusions from the coverage of the policy, but they will be set forth on the policy as items not being covered. Normally, those items found of record during the title search will not be covered, and these will be listed as "exceptions" to coverage. For instance, most properties have one or more easements in favor of utility companies to permit the location of gas, electric, water or sewer lines, and these will be set out in the title insurance policy. However, the policy insures that there are no easements other than those listed. I will be able to explain these items to you in more detail at the closing.
The owner policy protects you, the insured, as long as you have an interest in the property. It protects your heirs' interests in the property if the property is transferred to them, and it protects the warranties you give when you transfer the property. The mortgagee (lender) policy lasts only as long as the loan is outstanding, which means that you may be required to purchase a new mortgagee policy in the event you refinance your loan at a later time.
Owners usually purchase coverage in an amount equal to the purchase price of the property. The owner policy may include a provision that automatically increases the amount of coverage by ten percent of the original amount each year for the first five years without additional cost. The amount of coverage on a mortgagee policy is the amount of the unpaid portion of the loan including interest. (Premiums are charged based upon the fair market value of the property and the total amount of the loan.)
In today's economic market, lenders require title insurance to secure the interest they have in the property, and to assure the marketability of their mortgages on the secondary market. As an owner of the property, you should consider obtaining an owner policy to secure the interest and marketability of your investment... your new home.