Why do you need title insurance?
Most people don’t learn about title insurance until they’re signing documents at their lawyer or notary’s office and they learn they can pay a little extra for some insurance to cover an unlikely event. At Mortgage Sandbox, we believe it’s worth every penny and this article explains why buying it is a no-brainer.
What is the “Title”?
A real estate title is a document that specifies your rights related to the land, building, or strata unit that you own. Many people don’t know that even though you may own a property, others may have rights related to your property. You can search the title registry on any Canadian property to see who owns it and what other parties have rights to the property. Here are some common examples of what could be registered on the title to your home:
Mortgage - With your permission, any lender who is using your property as collateral will add their mortgage on your title.
Builders Lien - Whenever you perform work on your home, the builder or tradesperson has a right to file a lien on your property if they aren’t unpaid for the completed work. They can register a lien up to 45 days after the work was completed and on the sale of a property, builders liens are paid before the lender, and the homeowner.
Tax Lien - If you don’t pay your taxes, the government will put a lien on your property. This is similar to a builder’s lien except the government always get paid first.
Encroachment - This is where some physical object or structure hangs from an adjacent property over your property line. The actual structure that encroaches might be a tree, bush, bay window, stairway, steps, stoop, garage, leaning fence, part of a building, or other fixture. Agreed to encroachments are registered on title. For example a property may have been subdivided with a structure in one property overhanging the other. This encroachment would be registered on title so that any future owner is aware that it is an allowable encroachment.
Easement - An easement usually has more to do with access. For example, a beachfront property may have an easement along one side that provides neighbours the right to cross your property to reach the beach. Alternatively, you may have an easement that prevents you from building a structure that obstructs a neighbours view.
What is Title Insurance?
There are two types of title insurance. One that protects a lender who helps you finance the purchase of your home and another that protects the home buyer. Almost all lenders require that you buy insurance to protect them against issues with the title such as fraud. However, protecting yourself as the homeowner is optional.
Lender Title Insurance
We won’t talk too much about this insurance since you don’t have a choice in buying it. Typically the borrower pays a one-time insurance premium to protect the lender against certain risks until the mortgage is fully paid. What Kind of risks you ask? Here are some examples:
Failure of a strata corporation to disclose information that materially impacts the value of the property.
Protection against a builder, government, or other lender’s claim on your property that would have priority over the mortgage.
Protection against the borrower challenging the validity of the mortgage in the future.
Home Owner Title Insurance
Your home property and fire insurance covers the structure and the contents of your home. Title insurance protects your legal rights to own it.
Purchasing a home is the biggest financial commitment we make and few of us realize the potential risks of someone threatening our clear ownership of our home. You can buy title insurance when you are buying your home or you can purchase it later after the deal has closed (There is often a 6 month waiting period after your close date to add on a homeowner policy if it was not bought at the time of your home purchase). It is never too late to buy a homeowner policy and typically the cheapest time to purchase a homeowner title insurance policy is when you buy.
Why do I need title insurance?
Homeowner title insurance protects you against:
Improvements made without proper municipal permits or work orders - If discovered after you buy the home, the city could require you to remove the improvement or bring them up to code at your own cost.
A homeowner is notified by the city that an addition on their property that was built by a previous owner without the required building permits and too close to the property line. This is against the municipal zoning by-laws and they have ordered the building demolished. Title insurance would pay for the cost to remove the addition and compensate the homeowner for the decrease property value from the removal of the building addition.
- Encroachment issues - Walls, sheds, laneway homes, walkways, and garages are sometimes built on neighbouring properties and need to be moved. This can happen if previous owner built without verifying the legal property boundaries.
A laneway house was built as a rental by the previous owners. They has used an old hedge to indicate the property line and built on their side of the hedge. Shortly after you buy the home, the neighbour passes away and their kids prepare to sell the home. The backyard looks different from their childhood recollections so they have it surveyed and discover your laneway house encroaches 2 feet over their property line. Title insurance would cover the cost to remove the laneway house and compensate the homeowner for the the decrease in the value of the property.
- Fraud and forgery - If someone forges your signature and registers a mortgage on your home without your knowledge the onus is on you to prove you were victimized by fraud and the the legal fees will be very costly. With all of the stolen customer data in the news these days, the likelihood that a fraudster could get enough information to impersonate you has increased. There aren’t concrete statistics on mortgage fraud, but a 2007 report by the Criminal Intelligence Service Canada estimated mortgage fraud over “hundreds of millions of dollars annually.” Title insurance would cover your legal fees to get the fraudulent mortgage removed from your home.
Lukrezia Buzanic is in her home for 28 years but without her knowledge Manulife Bank put a mortgage on her home for $640,000. Someone posing as Buzanic had applied for a $640,000 mortgage at Manulife using a driver’s licence with her name on it, as well as fake T4 slips in her name. It wasn’t until the fraudster started skipping payments on the credit card and the mortgage, that Buzanic says she started getting 12 to 14 calls a day at home from the bank’s bill collectors. Read full Financial Post article Title insurance would pay the legal fees to prove the mortgage was fraudulent.
You’re spending hundreds of thousands of dollars to buy a home. We recommend that you spend a bit more for title insurance. For a condo, the lender insurance can be as little as $150 and the incremental coverage for the home owner can be as little as $25. The price of insurance is different depending on the type of home you buy and how expensive it is. Of course with a more expensive home you have more to lose.
I recently spoke to Camran Monsef, a Principal at Lions Gate Law Corp. and he said that he recommends borrower title insurance particularly because of the fraud protection.
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