6. Insurance

Private Mortgage Insurance (PMI)

PMI is an insurance that protects a lender against loss if the borrower defaults.  Most lenders require a borrower to purchase private mortgage insurance if the loan they are taking out is 80% or higher of the value of the home.  PMI has benefits for both the borrower and lender, the lender is now protected against default, and the borrower is able to secure a loan with a smaller down payment.

Flood Insurance

Congress mandated mortgage lenders to require flood insurance on properties that are located in areas at high risk of flooding.  Homes and buildings in high-risk flood areas with mortgages are required to have flood insurance.  These areas have a 1% or greater chance of flooding in any given yearm which is equivalent to a 26% chance of flooding during a 30-year mortgage.  Homes in moderate-to-low risk areas are not required to have flood insurance.  However, flood insurance may still may be a smart bet, since most home owners policies not not cover flood damage.  In addition, a lender may still require flood insurance even if it is not federally required.  Be sure to ask your realtor if the home you are considering is in a flood zone.

Title Insurance

Simply explained, "title" is the right to own, possess, use, control, and dispose of property. When you buy a home, you are actually buying the seller's title to the home. A deed is the written legal evidence that the seller has conveyed his or her ownership rights to you.

Before the closing meeting when the actual transfer of ownership occurs, an attorney or title specialist generally conducts a title examination. The purpose of the title examination is to discover any problems that might prevent you from getting clear title to the home. Generally, title problems can be cleared up before settlement. But in some cases, severe title problems can delay settlement, or even cause you to consider voiding your contract with the seller.

What are some common title problems?

Title problems come in all shapes and sizes. Following are just a few examples of situations that can create a title problem:

  • The home to be purchased was owned by the seller's parents, who intended to use it for their retirement. The seller's father died several years ago, and the mother just recently passed away. A title search reveals that the property is titled in the mother's name, but there is no will on file to indicate how she disposed of it.
  • You are buying a house to which an addition was made several years ago. The sellers of the home took out a home improvement loan and did the work themselves. They have repaid the loan, but the lien was never removed from the title.
  • The seller of the house added central air conditioning several years ago. The seller and the contractor had a dispute over the workmanship, and the seller withheld the final payment on the contract. The contractor filed a mechanic's lien on the property, which has never been removed.
  • You are buying a house with a newly paved driveway. The seller of the house bought his neighbor's share of their shared driveway and converted it into a private driveway when the neighbor built a new driveway on the other side of his house. Unfortunately, ownership of the expanded driveway doesn't appear in the public records.

Some "clouds on title" can be corrected relatively easily, like most of the examples listed above, while others can become quite complicated to remove. You should insist on being kept informed of every step in the title examination process. If title problems are uncovered, it is important for you to understand your legal rights.