Insurance requirements have become such an integral part of the real estate and loan transaction, they must be included in any comprehensive discussion of real estate finance. Every purchase transaction will require title insurance, and every mortgage will require homeowners insurance. In some situations, lenders may also require flood insurance and/or mortgage insurance. Even purchasers of condominiums and townhouses will have other insurance options to consider.
Title insurance was devised to eliminate most of the problems created by abstract attorneys and the abstract opinion. Title insurers examine all the recorded documents pertaining to a specific property to produce an insurance policy that covers the purchaser, the lender, or both, from any defects to the title. Title insurance policies are now fairly uniform, and the insurance companies have the financial resources to defend and compensate their insured.
The owner’s policy insures a purchaser that the title to the property was transferred free of any defects, except those which are listed as exceptions. The settlement agent will obtain and record the documents required in the title commitment. In most real estate transactions, the seller will pay for the owner’s policy. The buyer pays for the lender’s policy and endorsements.
The owner’s policy is valid as long as the ownership of the property remains the same. Transferring ownership of the property to another ownership entity, such as a family trust or a spouse by a quit claim deed may void the title policy. Whenever possible, the owner should use a special warranty deed instead of a quit claim deed to facilitate changes in ownership. This will keep the title insurance intact.
Often referred to as a loan policy, this is issued to mortgage lenders to protect their interest. Typically, lenders require standardized forms be used. The lender’s policy will guarantee the validity of the loan documents, and will follow the assignment of the mortgage or deed of trust when the loan is transferred.
Also referred to as Hazard Insurance, homeowner’s insurance provides protection against damage to real estate improvements, damage to contents, and liability coverage. Every time a home is purchased with a mortgage, the lender requires the owner (borrower) to obtain property insurance as a condition of the loan closing. This insurance must be maintained until the home is paid off. This is a comprehensive policy that provides coverage for most available perils, including full replacement of improvements, liability, temporary living expenses, outbuildings, and contents. The contents coverage extends to losses away from the premises, such as in a car or storage unit. The insurance premiums are usually included as part of the mortgage payment (the ‘I’ in the PITI payment).
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Prior to 1968, flood insurance was virtually unavailable through either the private sector, or the federal government. Until then, the Federal Government attempted to control coastal and river flooding through re-channeling of water, and using dams and levees to restrict the flow of water. The dams had the added benefit of producing hydroelectric power, and providing storage for irrigation. But the increasing cost of these projects, as well as the high cost of flood- related damage, influenced the government to explore offering flood insurance to reduce the disaster related payments. Typically, floods affect entire communities or towns, so the local leaders often looked to the federal government to provide disaster relief for the victims. The question debated by the Federal Government was whether they were better off using their limited funds to provide disaster assistance to flood victims, or to provide federally sponsored flood insurance coverage. Congress realized the government could not keep absorbing the escalating costs to taxpayers for flood disaster relief. This led Congress to establish the National Flood Insurance Program (NFIP) in 1968.
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