Construction of a new home can raise special title problems for the lender and even the owner. You may think you are the first owner when building your home on a purchased lot, but there were most likely many prior owners of the unimproved land.
To know for certain whether there are any existing liens, you’ll need a title search to uncover them. For instance, a builder may have failed to pay subcontractors and suppliers, and those subcontractors could then place a lien on your property. That lien is against you and the property, not the builder.
If you obtain a loan, the lender will be require you to have a lender’s title insurance policy. This will ensure that the title is clear and they are insuring the correct property. It is based on the amount of your loan and only protects the lender’s interest if a title problem arises. It does not protect you, the buyer of the property.
If you want protection you’ll need an owner’s title insurance policy, which is valued on risk—with the risk being the amount you paid for the property.
For example: If you own the land that you purchased 10 years ago for $7,000 your owner’s policy has a risk value of $7,000. Now you build your dream home on it, with a loan or without a loan, for $325,000. If you do not obtain a new owner’s title policy your risk value is still $7,000. If a title defect surfaces and costs $35,000 – you are stuck with paying the difference – $28,000.
So in short, if you want to protect yourself from title defects and other threats to your ownership, you’ll want to obtain title insurance not just on your initial purchase of the property, but also on your home once it’s built.
At Title Junction we care about helping you stay informed throughout your real estate transaction. Have questions? Give us a call at 239.415.6574.
In case you missed it, check out our last Title Junction post: Homeowner’s Associations: How They Work