Nolo's Essential Guide to Buying Your First Home (56 page)

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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart

Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate

BOOK: Nolo's Essential Guide to Buying Your First Home
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After All That Prelim Work, Why You Still Need Title Insurance
 
After the title search process, you can feel pretty comfortable that the house will be yours alone (subject to a few easements and exclusions). So why do you need a title insurance policy? It’s protection for you and your lender in case the report missed any clouds on the title.
If you’re taking out a mortgage loan, your lender will require, at a minimum, that you buy a “lender’s policy” (also called a “mortgagee’s policy”). This reimburses the lender for any mortgage payments you can’t make because you’ve lost the house to someone else’s claim on it. The lender may also require you to buy an “owner’s policy,” covering your own legal fees and other losses, as yet another step toward protecting its collateral.
Even if you’re not taking out a loan from an institutional lender, you should still buy an owner’s policy. No title search, no matter how complete, can predict when a long-lost relative will turn up or whether paperwork buried for years under a misspelled name will reveal a claim concerning the property.
Why Buyers of Newly Built Houses Need Title Insurance
 
If you’re the first owner of a newly built house, you still need title insurance. Someone owned the land your new house will sit on, and what’s more, if your own developer fails to pay its subcontractors or suppliers, they can file liens against your property.
You may, however, qualify for a discount if your developer previously bought title insurance on the land. The title insurer may also ask that your developer sign an affidavit stating no knowledge of judgments or liens attached to your property and that all people who supplied labor or materials for the house have been paid in full.
What’s Excluded From Your Title Insurance Policy
 
Any issues revealed by the title search that can’t be wiped out will be listed as exclusions in the preliminary report—and ultimately within the title insurance policy itself. If you aren’t happy about what’s going to be excluded, you can cancel the sale. Some issues won’t be worth the fuss, however, such as easements allowing your local power company to come check your meter.
One of the most important limitations on coverage concerns future events. Once the policy’s effective date is established, anything you do to cloud your property’s title—for example, failing to pay your mortgage or a contractor who then files a lien—is considered your own problem. Your title insurance policy covers you only for events that arose before you bought the house.
You’ll also find some standard, boilerplate exclusions in your title insurance policy, such as for boundary line disputes, unrecorded easements, taxes, special assessments and mechanic’s liens, and mineral and water rights. You’ll need to decide (probably with input from your lender) whether to buy extra coverage (endorsements) for these items if it’s available. Lenders often require you to buy endorsements against unrecorded easements and liens, defects that might be found only by an inspection or survey of the property (which your title insurance company won’t do), mining claims and water rights, and rights of people currently living on the property (for example, if you’re buying a duplex with rental tenants).
Is That Tree on Your Side or Ours?
 
One of the biggest sources of homeowner angst is figuring out where your property ends and the neighbors’ property begins. Bad news here: Your title insurance policy won’t help forestall such boundary line disputes. Most policies include a basic plat map, but it’s nothing you can draw a precise line by (although if it’s clearly wrong, your title insurance will cover you). If you want certainty, call in a professional surveyor, who can put in markers denoting the exact boundaries. Many lenders insist on having such surveys done.
Unfortunately, surveyors’ fees can run into the thousands of dollars, so it’s best to figure out preclosing whether any boundary issues might exist. Start by asking the seller whether past disagreements have arisen with the neighbors over property lines, trees, driveways, and the like. Also, review the report, especially the plat map, and take a look around the property. Note any lines that don’t seem to match the map, as well as oddly placed fences, large trees that seem to straddle both properties, and neighbors’ cars or possessions on your side of the supposed line. If you find any of these, ask the seller to pitch in for the survey. You can save money by asking the seller whether a previous survey was done and getting it updated. For more information, see
Neighbor Law: Fences, Trees, Boundaries & Noise
, by Cora Jordan and Emily Doskow (Nolo).
 
 
TIP
 
Get some additional coverage for free.
According to attorney Fred Steingold, some title companies are willing to issue an owner’s policy “without the standard exceptions,” giving you coverage against boundary encroachments and construction liens. In return, the seller must sign an affidavit stating that there’s been no construction recently that wasn’t paid for, and you must provide a report from a surveyor—which your lender may order, anyway.
 
Yours, Mine, or Ours? What to Say on the Deed
 
The final step in the transaction will occur when your escrow agent or attorney prepares a new deed and files it in the public land records office. We’re not there yet—but you’ll need to decide in advance what the deed should say about how you’ve decided to legally own the place. Depending on where you live, your and any cobuyers’ choices as to how to take ownership may include:
• sole property
• joint tenants with right of survivorship
• community property
• community property with right of survivorship
• tenants by the entirety, or
• tenants in common.
 
Your closing agent or attorney should be able to tell you which options are available in your state.
 
TIP
 
Your choice isn’t permanent.
Be careful about how you take title—it can affect important things like tax liability and division of the property if you die. But you can change your deed later (though you may need all the other owners’ consent first).
 
Sole Property
 
If you’re buying a place on your own, you’ll hold it as your sole property, and your deed will reflect that. The property belongs to you alone. If you’re married but nevertheless purchasing the house on your own, you can still own it as sole property. In that case, talk to an attorney, to discuss not only what to put on the deed, but how to make sure it remains your sole property. For instance, this may require you to make all the payments on any mortgage or other house-related expenses like property taxes, repairs, and upgrades. Your spouse may also need to sign a quitclaim deed giving up any interest in the house. However, that won’t necessarily preclude your spouse from claiming an interest based on later contributions—for instance, if you use community property (like your salaries) to make mortgage payments.
Joint Tenants With Right of Survivorship
 
If you buy the property with at least one other person, you can take title in joint tenancy with right of survivorship. In most states, joint tenants must always own an equal interest in the property (50/50 if there are two of you). The most important feature of such ownership is that if one of you dies, the co-owner automatically gets the other share of the property, without the need for probate.
It’s common for married couples, domestic partners, and those in committed relationships to take title this way. It’s not so popular among other cobuyers, who may not want to leave their half-interest to their co-owner. Some states restrict joint tenancy—for example, in Texas it can be created only by a separate written agreement.
Community Property
 
This one’s for married couples (and in some places, registered domestic partners) only, and then in only a handful of states (listed below). But it’s usually the most beneficial option where available. Couples that own their homes as community property each own half of the property, which they can pass on to whomever they please through their wills. They can’t sell or give away their share while living unless the other spouse consents.
Community property ownership often comes with significant federal tax advantages, but currently only to married couples, not same-sex couples who are married, in a civil union, or registered as domestic partners (to whom federal tax rules don’t apply). Some of these same-sex couples will enjoy state tax benefits, but these are beyond the scope of this book.
When one spouse dies, the
entire
property is revalued, for capital gains tax purposes, to its current market value. This new value is sometimes referred to as a “stepped-up basis.” When the house is eventually sold, the stepped-up basis is treated as if it were the original purchase price to determine the amount of profit on the sale. The higher your stepped-up basis, the lower your profit, and the lower your capital gains tax obligations. This beats the tax benefits available to buyers in joint tenancy—they also get a stepped-up basis, but for only half the property when one owner dies. For more information, see IRS Publication 555,
Community Property
, available at
www.irs.gov
.
Community Property States
 
The states that currently have community property laws include Alaska (a somewhat unusual law, in which community property is never automatic but can be chosen), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
 
Community Property With Right of Survivorship
 
In a few states, another way to hold title is “survivorship community property” (currently available in Alaska, Arizona, California, Nevada, and Wisconsin). Property held this way doesn’t have to pass through probate when one spouse dies, but instead goes straight to the other spouse. It’s similar to joint tenancy but limited to married couples (or registered domestic partners). It still carries the other benefits of community property, as well.
Tenants by the Entirety
 
Another option usually reserved for married folk—and in some states, those in registered civil unions or similar “official” relationships—is tenancy by the entirety (available in about half of the United States). Its main advantage is protecting the property from creditors. You and your spouse each own the
entire
property and can sell it only with the other’s consent. In most states, if one spouse is in debt, creditors can’t come against that person’s share of the property—a major difference from joint tenancy. However, it’s similar to joint tenancy in that if one spouse dies, the other gets the place without probate hassles.
Tenants in Common
 
If you’re unmarried and buying with another unmarried person, you might choose to own the property as tenants in common (TIC). This allows you to hold property together in unequal shares. For example, if you’re buying with a friend and have agreed on a 60/40 ownership split, your deed can reflect that. If you don’t specify your shares in the deed, the split will be assumed to be equal.

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