Understanding the difference between title insurance and title endorsement is part of buying a home. And whether you’re ready to buy your first home or you’ve done the whole home buying thing before, you’ll need to either learn or refresh your memory of the title insurance and endorsement lingo used by real estate professionals.
Humblebrag: We specialize in real estate lingo. Our guide will give you the lowdown on title endorsements, how they work and when to use them.
Title Insurance: The Basics
First things first: titles and title insurance.
What is a title in real estate? Simply put, a title is a document used to identify the owner of a property.
Let’s say you’re a home buyer, and a seller has accepted your offer. A title company will perform what’s known as a title search. The company searches through public records to verify who legally owns the property and to find out if there are any claims against the property that could prevent you from buying the home.
If everything checks out, you’ll attend a closing and sign the paperwork to finalize your home purchase. But before you close the deal, you’ll need to buy title insurance.
What is title insurance?
When you get a mortgage, the lender typically requires you to purchase lender’s title insurance. Lender’s title insurance protects the lender if there’s a problem with the title, such as an error in the property records or a lien on the property.
A lien is a claim against the property that indicates the owner of the property owes a creditor money. One common example is a construction lien. The lien can be placed against a property if a contractor isn’t paid for their work. Tax liens are filed when a property owner doesn’t pay their property taxes.
Lender’s title insurance protects the lender, not the homeowner. To protect your investment in the property, you have the option of buying owner’s title insurance coverage. Owner’s title insurance protects homeowners against risks like liens, recording errors, fraud and easements that could make the property less valuable.
Once you’ve got your title insurance policy, you’ll need to decide whether to buy a title endorsement or two. Title endorsements customize title insurance policies, making policies a better fit for the needs of the lender and the homeowner.
What Is a Title Endorsement?
A title endorsement (or title policy endorsement) modifies an existing title insurance policy. Title endorsements are usually used to expand the title policy, giving you or your lender additional coverage. If you know the property may have a title issue, a title endorsement can give you extra peace of mind.
Some title endorsements are offered to lenders and owners, while others are only available to lenders. Your lender may require you to buy certain endorsements – but even if it isn’t required, you may want to purchase a title endorsement to protect your financial interests.
The price of a title endorsement varies by state. Plan on paying at least $25 for each one. Endorsements are an extra cost in addition to the cost of title insurance, which is about $1,000 for every policy. If you need title endorsement coverage, it’s important to purchase the right type.
Now that you’ve got the 411 on property titles and title insurance, we’ll do a deep dive into common types of title endorsements.
What Are Common Types of Title Endorsements?
It may surprise you to learn that there are approximately 100 types of title endorsements available to lenders and homeowners. The good news is that you don’t have to buy all of them – just the ones that make sense for the home you’re buying.
Common lender’s title endorsements
Two of the most common lender’s title endorsements are the American Land Title Association (ALTA) 5-06 and 8.1-06 endorsements.
What is an ALTA 5-06 endorsement?
ALTA endorsement 5-06 expands a title insurance policy to cover losses associated with several title-related problems. It’s typically used to modify title insurance policies for industrial parks, commercial centers and housing developments.
What is an ALTA 8.1-06 endorsement?
ALTA endorsement 8.1-06 is an environmental protection lien that went into effect in 2006. Intended for residential properties and land, the endorsement covers losses due to recorded environmental protection liens that aren’t listed as exceptions on the title insurance policy.
An environmental protection lien is used to indicate that a property owner owes money for the cleanup of hazardous substances or other actions needed to fix dangerous environmental conditions. For example, the Environment Protection Agency can issue liens to recoup the costs of cleaning up Superfund sites.
Common owner’s title endorsements
These are some of the most common title endorsements for the owners of residential properties:
Indirect access and entry
This endorsement provides coverage for a loss arising from the absence of an easement to provide direct access to a public street or curb. An easement gives a person or entity the legal right to use property owned by another person. A homeowner might need an easement if the only way to reach a public street is to walk through their neighbor’s front yard, for example.
Easement and encroachment
Easement endorsements cover damages related to the encroachment (think: intrusion) of a building or structure on your property onto a neighboring property. Encroachment endorsements cover losses that arise from the removal of a building or structure that encroaches on adjoining land.
Minerals and subsurface substances
These endorsements are more common in states known for mining activity. They cover loss or damage associated with the removal of buildings or additions due to an existing right to use the land to extract minerals or other substances.
Survey coverage covers losses that occur if the surveyed land described in the endorsement isn’t the same as the land described in the title insurance policy. A land survey is a description of a property developed and based on physical measurements. This process helps determine the boundaries separating one piece of property from another.
Covenants, conditions and restrictions
Covenants, conditions and restrictions endorsements cover loss caused by the violation of an existing covenant, condition or restriction. A covenant is a legal obligation that outlines what you can or can’t do on a property. For example, many homeowners associations use restrictive covenants to prevent residents from renting rooms or operating home businesses.
Zoning endorsements cover losses that arise from changes in a property’s zoning status. Governments use zoning laws to control land development and organize how properties are used. If a property is zoned residential, for example, the owner may be prohibited from setting up an office and using it to meet with business clients.
Contiguity endorsements are usually used when a property has been split into multiple parcels. Contiguous parcels share common boundaries and are used for similar purposes. A contiguity title endorsement covers losses arising from any gaps or strips that separate the contiguous boundary.
Are Title Endorsements Necessary?
In many cases, a mortgage lender will require that a borrower purchases lender title endorsements. That’s because your lender wants to protect its financial interest in the home you’re buying. If there’s a problem with the title, a title endorsement allows the lender to recover the money it loaned you.
When it comes to buying owner title endorsements, it depends on the property and the coverage it needs. If there’s no mining activity in your new neighborhood, for example, then you probably don’t need a title endorsement for minerals and subsurface substances. A real estate attorney can help home buyers decide which, if any, title insurance endorsements are necessary.
Better Safe Than Sorry
Again, some endorsements are only available for lenders, while others are available to both lenders and owners. If a lender requests an endorsement that’s also available to you, it’s wise to consider getting it. Contact the title company or your attorney if you have questions.