Insurance choices home buyers face

Home buyers & sellers in Silicon Valley hear about various types of real estate related insurance products and they can sometimes be confused with one another: Homeowner’s (or Fire) Insurance, Title Insurance and Home Warranties. We’ll discuss them today and hopefully will clear up the confusion.

Homeowner’s Insurance pays you money to cover losses in the event of a fire or other unseen catastrophe (such as a tree falling on your home, a fire caused by lightening or a fence falling down in a windstorm).  Often there’s a deductible but beyond that you have major coverage for losses in most cases. There are some caveats, of course.  If you purchase a home using financing, your lender will require you to buy this type of insurance.  It is sometimes also called Fire Insurance. 

Homeowner’s insurance does not cover damage from earthquakes or flooding from creeks, rivers or dam failure.  If you have a fixture that fails and the home floods, though, that is probably covered. 

Homeowner’s insurance does not guarantee that if something is destroyed it can be rebuilt.  For instance, in older parts of Santa Clara County (such as downtown Saratoga, San Jose, Los Gatos and Willow Glen) there are detached garages built right up against the property line or very close to it.  In most places there are now setback requirements of about 5 feet or so.  Should that garage burn down (or be destroyed by termites or anything else), it can only be rebuilt, most often, if it’s moved.  Creating a new foundation is expensive – and that may not be covered by your HO insurance.

Title Insurance comes in two basic versions: owner’s policy of title and lender’s policy of title.  This type of insurance is against issues with who owns the home – any title issues or “clouds on title”.  The owner’s policy is a one-time expense that’s paid for, usually by the seller, when you purchase a home.  The lender’s policy is normally paid for by the buyer is there’s a loan on the property. If you refinance your property, you’ll be required to get a lender’s policy each time you refi the real estate.  (I wrote about it a couple of months ago here on the Valley of Hearts Delight blog: What Is Title Insurance and Who Pays For It?)

Home Warranties cover malfunctions or failures in the components of the home, for example, if the oven stops working, the water heater springs a leak, etc.  Not everything in the house or condominium is insured by the basic policy but there are “riders” that can expand coverage to include items such as the air conditioner, the roof, a pool, etc.  Home warranties generally cost anywhere from $240 to $600 depending on what’s included.  If the new home owner needs to have a service call, the cost will be anywhere from about $40 to $60 for the visit and usually that covers repairing or replacing what’s not working.

If you are buying an older, historic home it is important to remember that “code upgrades” will not be covered by most standard policies.  For example, once I had a listing in Cambrian Park where the house was about 60 years old.  The water heater was tucked into a teeny, tiny closet.  When the water heater failed, the closet had to pretty much be dismantled so that the water heater could be exchanged for a new one.  The code, though, required some changes in the way it was to be installed – it could not go back in the way it was (and be permitted).  With a regular home warranty the changes required due to the code would not be covered, but there are riders that do cover it. Home warranties are sometimes also called Home Owner Protection Plan (HOPP).

Want to know more about home warranties?  I wrote in detail about HOPPs a couple of years ago in this blog: Buying a Home Warranty in Silicon Valley? What You Need to Know to Choose Well.

Title insurance seems to be a mystery to many home buyers and sellers, so I want to give an overview on it in this post.  We’ll discuss what it is, why it’s needed and when, and also who pays for it. (For the difference between title insurance, home warranties, and homeowner’s insurance, please see another post on this blog: Homeowner’s Insurance, Title Insurance and Home Warranties.)

What is title insurance?

The purpose of title insurance is to protect against loss of ownership of the land, condo, house, estate, or other real estate due to a problem or defect with title. The loss could be complete (losing the property entirely) or partial (losing a portion of ownership or use).

Sometimes the loss could be as a result of a “defective recording” of a document, an improper signing of a document, or much worse, forgery or signing under duress (being forced to sign under undue pressure, such as by blackmail).

Loss of title can also result from hidden heirs who may claim a partial interest in the property. Another type of loss would be if someone claimed an unrecorded easement, which might cause a “partial loss”. When the title is somewhat in question, or considered “not clear”, it is often said that there is “a cloud on title”. What you want, though, is “clear title“. You want to know that no one else will have any kind of right or claim to the property: not a lienholder, not the IRS, not a contractor, not the county tax collector or anyone else.

Who has an interest in a property? Sometimes it’s just the owner but often others have a right or interest too. Most often, these interests, easements or liens are recorded, but sometimes they are not recorded.  And at other times, they are hidden (such as with secret marriages or secret heirs).

In the extreme (and most feared, and probably most common) case, perhaps some real estate was sold illegally, say due to a forgery or some other deceit, but the loss by the true owners to the title wasn’t noticed or discovered right away.  Some time later, perhaps several sales later, the error is realized.   Now we have a problem: the current “owner” paid for the house, but someone who never really sold it shows up and says it’s his or hers. What happens to all the in-between or past owners who never rightfully owned the property? Where’s the recourse now? That’s where title insurance comes into play.

Luckily, claims for title insurance are seldom made, but when they do happen, they’re expensive!

There are two main categories of title insurance: owner’s policies and lender’s policies. When you purchase a home in the Santa Clara County area of Silicon Valley, the seller ordinarily pays for the owner’s policy of title.  That policy will be good for as long as you own the home.  If the purchase of the property is “all cash”, only the owner’s policy will be needed.

In most Santa Clara County real estate deals, the buyer finances all or part of the purchase with some sort of loan.  When that happens, the lender requires a lender’s policy of title insurance so that the lender’s interest is also covered. Usually, the buyer ordinarily pays for the lender’s policy of title. The lender’s policy is good as long as the current loan is in place. Should you refinance, you’ll have to buy this type of insurance again (unlike the owner’s policy).

Further, there are two levels of coverage with title insurance: the standard level is the California Land Title Association (CLTA) and the extended coverage or ALTA (American Land Title Association), which is sometimes called the Homeowners Policy of Title (HPT) Insurance.  The latter simply covers more, including things such as unrecorded easements. Guess which one the lender usually requests? You guessed correctly if you guessed the more extensive policy!  The seller is usually obligated to provide owner’s coverage to the buyer, but is not required to buy the more expensive, and more extensive policy.  So you might want to learn a little more about these two and see if, as a buyer, you’re willing to pay the difference to upgrade the type of owner’s policy you receive.  Old Republic Title has a good comparison chart online which you should find helpful.

If you are interested in purchasing a foreclosure on the courthouse steps, you’ll probably need to pay for the home in cash and most likely will be unable to get title insurance until sometime after you take possession of the property.

According to Old Republic Title, title insurance is an American invention.  It was first introduced in the late 1800s.  I’m a little surprised it came in so late, because every time this land had a turnover in government, the ownership of lthe property came into question.  Our Santa Clara County was, at various times, claimed by the native Ohlone, Spain, Mexico, The Republic of California, and then the United States of America.  When the various land grants or patents came into play, landowners had to go before a magistrate to plead the case that he or she really owned the property in question.

Silicon Valley is a region near the southern part of the San Francisco Bay, consisting mostly of Santa Clara County but spilling over into a couple of other adjacent counties.  Here’s the list of “who pays what” as is customary in each county (it’s always negotiable, though).

What about buying a foreclosure – can I still get title insurance?

If you purchase a pre-foreclosure home, a short sale or bank owned home you should be able to obtain title insurance.  If, however, you purchase a home at auction, or on the courthouse steps, you may not get a regular grant deed and you may not be able to get title insurance.  Remember, if you buy at the courthouse steps auction, it’s cash and there are no warranties.  Some home buyers have been very successful picking up cheap homes that way, but others have spent a lot of money and only gotten a nightmare in return.  It is imperative to know what you are doing, put in a LOT of research and be triply careful if buying this way.

More information about title insurance

Several local title companies have great information online, so next I’ll share some of those links with you:

Old Republic Title: Historical Developments (in title insurance)

Chicago Title: What is title insurance?

Wikipedia article on Title Insurance

North American Title – 70 Ways to Lose Your Home

Title Insurance (article on the California Association of Realtors website, very comprehensive and concise)

Should you pay for title insurance if you buy “all cash”? Some home buyers fail to see the worth because claims are so seldom.  However, if there is a problem, the cost to rectify it far, far outweighs the cost of the policy.

How much extra money will it take, beyond the downpayment, to purchase a home in San Jose or Santa Clara County? The answer varies, depending on what, where, and how you buy. Today I’ll offer some general information on home buyer’s closing costs in Silicon Valley.

Just need a rule of thumb on the costs? A generalization, a really rough estimate is two percent of the purchase price, but your actual figure could be substantially more or less. If your loan is a “zero point” product and if you do not need to pay for inspections, your costs should be between .5% and 1% of your purchase price. If you buy a home that needs a lot of inspections and specialized ones to boot (structural engineering report), your costs will be higher.

What makes residential real estate closing costs vary so much?

• The City of San Jose charges a transfer tax which is normally split 50/50 between buyer and seller. The cost is $1.165 per thousand each for buyer and seller (so for a $600,000 purchase price, $990 each)
• Short sales and bank owned properties usually do not have pre-sale inspections available, so you will need to pay for all inspections (this is often a good idea anyway, but at least if the seller has some inspections available you can know whether you’re seriously interested in the property before spending hundreds of dollars on those reports)
• Condominiums and Townhomes will have HOA (Home Owner Association) transfer fees that you’ll have to pay when buying (they also charge the seller hundreds to provide you with a complete packet of documents on the minutes, budget, articles of incorporation, bylaws, newsletters etc.). Often this is about $300.
• Some neighborhoods may have extra bonds and assessments that residents have voted in, and these raise your property tax bill.
• Loan fees can range from a few hundred dollars to several thousand, depending on the mortgage program you choose. Points paid at close of escrow may be a worthwhile strategy for you – discuss it with your lender and your tax professional!
• Are you buying a home “As Is”? If so, expect repairs to be needed even if the home “looks great”. It is not untypical for a house to require about 2% of the home value in upgrades and fixes, so if buying “as is”, factor that in, especially if there are no pre-sale inspections!

What do inspections cost?

Roof inspections run between about $80 to $120 for most houses, but larger homes or those with special conditions may cost more.

Chimney inspections usually cost close to $100 too. Naturally the charge will be higher for more than one fireplace or chimney per home.

Property or house inspections are less expensive when the home is smaller, newer, and there’s no crawl space (usually). A tiny condo might be a couple or three hundred dollars. A large house of 5,000 square feet to 10,000 SF will be far more expensive, perhaps over a thousand dollars. Typical house? About $450.

Pest inspections likewise are less expensive on smaller, younger properties and more expensive on larger, older ones. Typical fee is appx $250.

Many or perhaps most inspection companies have two prices, with a good discount is usually offered if you pay the day that the inspection is performed. Either way, if you order the inspection, you are obligated to pay, even if you later decide to not complete the purchase of the home.

For most buyers of single family houses, budget in about a thousand dollars for inspections. You may need to do other inspections too, though, if something is uncovered in the home inspection. For instance, you may need a heating specialist to look at the furnace, an electrician to estimate repairing safety issues, or other specialists. If you need a foundating or soils expert, it will be very costly. If you are in a remote area of San Jose, you may need well water tested, a septic tank tested, or other atypical inspections and you’ll need to budget in more for these.

What are other typical closing costs for home buyers?

Your loan fees you’ll need to obtain from your lender. The appraisal fee is usually paid upfront and the cost is based on the size of the home, normally a few hundred dollars ($300 to $500 is the typical range, but again it varies).

The title company will charge a notary fee ($10 per signature on notarized documents), a fee for printing your loan papers (if they come by email, which is normal now, often about $300), a fee for the lender’s policy of title insurance (based on the purchase price of your home, often more than a thousand dollars), and possibly other misc fees to cover their paperwork.

Most lenders are looking for 20% down, and you will need to also have money set aside for closing costs (about 2% for many buyers) and finally also “reserves”. The bank wants to know that you have money “just in case”. Each lender will have a different guideline but some are looking for as much as six months of reserves.

That said, FHA loans are available up to $729,950 this year and they only require 3.5% down, so definitely talk to your lender if you are not in the 20% down category! The interest rates on FHA loans are very competitive. Purchases using these programs have more red tape and are more work all around, but it’s a great opportunity to get into a home when there’s not a lot of downpayment money to go around.