Do You Need Title Insurance For New Construction?
Oct 26, 2022
Buying new a new construction property has many advantages - such as customization of finishes, modern floor plans and all new mechanicals. When it comes to closing on the new home, the closing attorney or title company will offer you an "owners" title policy.
Unlike the lender title policy, which is mandatory if you're obtaining a mortgage, an owner's policy is completely optional. And for good reason - you may not need it at all.
There are three main questions to ask when considering if you need an owners title policy.
1- Are you paying cash for the home or obtaining a mortgage?
2- Is the builder a national corporation or a local general contractor?
3- How large is the development/neighborhood that is being built?
We will explore why these questions matter and how they might impact your decision. But first, it's important to explore what title insurance actually covers and the risks it is designed to mitigate against.
Cash or mortgage?
Since your lender wants to be sure the property has clear title, they will require that a "Lender's Title Policy" be purchased. As a result, you'll need to factor this into your closing costs as the buyer. In short, you'll be on the hook for the lender's policy premium no matter what if you're getting a mortgage. For a $500,000 home, the typical cost of the lender's policy is about $950.
National or local builder?
For a new build property, mechanic’s liens for large scale developments are very unlikely because the national builders generally pay their bills and have in-house attorneys that can resolve liens quickly. Small builders on the other hand, are more likely to encounter problems with subcontractors which may impact you as the homebuyer.
In addition, large corporate builders do extensive diligence on the front end to ensure there are no major historical "flaws" in the title chain. Title insurance covers mistakes made in the recorders and registrars of deeds’ offices, but this may be redundant if the builder themselves have already negated this risk. In other words, buying extra title insurance may be redundant if it covers risks that were already resolved.
Major development or small neighborhood?
In general, a title search will uncover any existing liens and a survey will determine the boundaries of the property you’re purchasing. Luckily when a major development is constructed, attorneys typically de-risk much of the boundary dispute issues that may be surfaced initially by a large, corporate builder.
However, if your contractor is developing a 3 home neighborhood and does not have the resources or experience to uncover potential land disputes, you may want to obtain an owner's policy simply for peace of mind.
Basic versus Premium Coverage
If you do decide to purchase an owner's title policy, make sure to ask the title company or closing attorney if they can provide a quote on "basic" coverage rather than premium coverage.
All of the major title policy issuers - such as Fidelity, First American, Stewart Title and Old Republic all have different tiers/levels of coverage. You could save thousands by downgrading your policy, simply by asking prior to your closing.