Should I Get Owner’s Title Insurance For New Construction?

When you’re purchasing a new home, “title insurance” can seem like just another line item on the closing sheet — something that costs you money without offering a lot in return. This can seem even more true if you’re purchasing a newly constructed home — after all, if you’re the home’s first owner, how can a prior claim against your title even arise? 

However, there are good reasons for owners of new construction to purchase owner’s title insurance. In some cases, this essential protection can be even more critical for owners of newly constructed homes. Understanding why you should invest in owner’s title insurance for new construction can save homeowners from expensive risks and be ready for any surprises that might arise with their new homes.

What Is Owner’s Title Insurance?

Two title insurance policies are part and parcel of most real estate transactions: the owner’s title insurance policy and the lender’s title insurance policy. 

The owner’s policy is provided to the purchaser to protect against post-closing claims against title that might arise. The lender’s policy protects the mortgage lender’s priority as a creditor in the event of a claim against the property’s title. These insurance policies are part of the “closing costs” associated with the escrow and home sale closing process.

You’re Not The First Owner, Even Of New Construction

Most buyers understand that the title search performed during a home sale will involve reviewing public records regarding ownership of a particular home going back for a certain period of time, usually thirty years. This process might seem unnecessary on a newly constructed home — after all, no one else has ever owned this home before, right?

Well, yes and no. While it is true that you’ll be the first owner of the home, the land on which it was constructed, even if newly subdivided and developed, has undoubtedly been owned before, and it is still possible for a third party to step forward with a claim against title. 

A title search will review the chain of title for any potential defects, and will flag known defects so they can be resolved before closing. However, there may be defects that even a thorough search cannot uncover — in fact, the first owner of new construction can be more at risk for potential title defects than later property owners, as title for a particular piece of property may not have been reviewed thoroughly in a long time. As an example, a piece of land inherited by multiple family members may have been sold to a developer without proper permission of all heirs — if one heir steps forward and makes a claim against title to the land, all homeowners in the new subdivision may find themselves at risk of a financially devastating legal claim. Title insurance provides legal support in fighting any such covered claim, and restitution in the event the claim is valid.

Another potential risk that title insurance might protect against is an unknown easement on the property. For example, a utility company may have a right to use some portion of the land for future expansion of utility service to a previously undeveloped area. This right is attached to the land, so a homeowner caught unaware of the easement may find unexpected limits on their ability to develop the property in the way they’d envisioned. Your title insurance company can help resolve disputes related to property boundaries and easements, potentially saving you the difficulty and financial burden of removing a structure. 

If the home you’re purchasing is in a brand new subdivision, ensuring that the land you’re purchasing was properly subdivided, and that the home you purchase is on the correctly identified lot, can be critical protections against future claims of encroachment. While most property line disputes will be uncovered by a title search, your title insurance policy provides critical protections against a recording error or other mistake that may lead to costly litigation down the line.

The most important protection offered by owner’s title insurance on new construction is a protection against mechanics’ liens. A lien is a creditor’s legal claim to a property. A lien must be approved by a court, and can force the sale of a property if a debt is not paid. A mechanic’s lien is a claim made against the property by a contractor or other professional who performed work on the property for which they were not properly compensated. While most liens will be recorded and discovered during a title search, a lien that has been properly filed but that was misfiled through a clerk’s error may still be enough to force the sale of a property. Alternatively, a vendor may file a lien after the sale of the property for payments that were not due until after the sale date. Without owner’s title insurance, you, as the new property owner, would be forced to defend against these claims yourself. 

The Seller, Even Of New Construction, Might Purchase Owner’s Title Insurance For You

In Illinois and Wisconsin, it is customary for the seller of a property to purchase the owner’s title insurance policy for the purchaser, while the buyer generally pays for the lender’s title insurance policy required by any mortgage lender. As a result, you should ask your agent or attorney whether your seller will be providing an owner’s title insurance policy to protect your interest in your new home.

Learn More from Your Trusted Title Insurance Company

At Landtrust Title Services it’s all about the relationship. Our empowered title services team encourages responsive underwriting and provides a single point of contact to keep your deal moving, so it’s delivered on time, regardless of complexity. We partner with you, align with your goals, and provide a seamless process to ensure a smooth transaction.If you have any questions about title, contact Landtrust Title Services anytime at [email protected] or call 312.528.9210.

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