Do I Need Title Insurance on a New Build?

Many homebuyers assume a newly constructed home on a new plot has a clean legal history. However, this overlooks complexities regarding the land and construction. This article clarifies why title insurance remains important even for new construction.

What Title Insurance Does

Title insurance protects property owners and lenders from financial losses due to defects in a property’s title. Unlike other forms of insurance, which protect against future events, title insurance focuses on risks that existed in the past, before the property was acquired. A title defect refers to any issue that could challenge a person’s legal ownership of a property.

These defects can include errors in public records, forged documents, undisclosed heirs claiming an interest, or outstanding liens from previous owners. Before issuing a policy, title companies conduct a thorough search of public records to identify and resolve any existing issues. If a covered defect later emerges, the title insurance policy helps cover financial losses and legal expenses, including legal defense costs.

Why New Construction Has Title Risks

While the structure itself is new, the land underneath a new construction home has a history that can carry title risks. The parcel of land may have had multiple owners before the builder acquired it, and past transactions can harbor undiscovered issues. Problems often arise from how the land was previously owned, subdivided, or encumbered.

A common risk involves mechanic’s liens, claims placed by contractors or suppliers not paid for work or materials. These liens can be filed even after purchase, potentially making the homeowner responsible. Other concerns include boundary disputes, survey errors, and issues with access rights or unrecorded easements. Additionally, previous mortgages or liens on the undeveloped land might not have been properly released, creating a cloud on the title. Builder financial difficulties, such as defaulting on loans, could also lead to liens.

Lender and Owner Policies

Two primary types of title insurance policies exist: a lender’s policy and an owner’s policy. The lender’s policy protects the mortgage lender’s financial investment in the property. Lenders almost always require this policy to ensure their loan is secured by a valid lien, covering them against title defects that could jeopardize their interest. This policy’s coverage amount is typically based on the loan amount and decreases as the mortgage is paid down.

Conversely, an owner’s policy safeguards the homeowner’s equity in the property. This policy is usually optional but highly recommended, as the lender’s policy does not protect the buyer’s interests. An owner’s policy provides coverage for as long as the homeowner or their heirs retain an interest in the property, typically up to the property’s purchase price. Purchasing both policies simultaneously from the same provider can sometimes result in a reduced premium for the lender’s policy.

Understanding Your Policy’s Coverage

When acquiring title insurance, understanding what your policy covers and excludes is important. Standard owner’s policies typically protect against issues like forged documents, undisclosed liens, errors in public records, and unknown easements. These protections address common title defects that could challenge your ownership rights.

Some policies offer extended coverage, which can be particularly beneficial for new construction. This might include protection against unrecorded mechanic’s liens, certain survey errors, or building permit violations that could lead to title issues. It is important to review the policy’s exclusions, which specify circumstances or defects not covered, such as defects known to the insured, future events, or certain governmental rights. If a covered title defect emerges, the homeowner should promptly contact the title company to initiate a claim. The title insurer will then investigate the claim and manage the resolution process, including legal defense if necessary.