First, what is title insurance, and why does it matter? Without going into too much detail, title insurance is a type of indemnity insurance. Title insurance protects against any oddities or mistakes in the paperwork or record-keeping of the title and ownership of the land. It also protects against financial loss resulting from invalidity or unenforceability of mortgage loans if such a situation were to occur. Title insurance can protect either the lender or the owner, depending on what policy is taken out. Most lenders require title insurance that protects them and will have the cost of title insurance included in the closing costs to the borrower. The decision to purchase title insurance that protects the borrower is usually not mandatory and is up to the borrower to make the best decision for their scenario.
So when you’re looking to get a VA loan, especially for the first time, you might wonder if you’ll need to factor in the cost of title insurance as part of closing costs, and whether that title insurance will cover you or the lender. Some borrowers are also curious if the requirement for title insurance is coming from the lender or the VA itself – is it avoidable if I go to a different lender? Is that going to be a way I can differentiate between two similar lenders? The VA does not itself require title insurance to be purchased in order for a home loan to be guaranteed, but does allow the lender to require title insurance if they choose to. The only requirements from the VA concerning the title is that it conforms to certain parameters they have established to make sure veterans are protected when they are using their VA loan benefits. From the VA Pamphlet 26-7: “VA does not require a lender making a VA loan or the veteran-borrower to obtain title insurance. The lender may apply its own title insurance requirements to VA loan transactions. VA requires only that the title to the property meet the standards described in `Estate of the Veteran in the Property.'”
But what exactly are the VA standards for the title to the property? The good news is that’s mostly the lender’s problem and you as the borrower won’t have much to worry about in regards to it. Essentially, the VA simply wants to make sure that the title is acceptable to you as the buyer, title companies and attorneys in the area, and the lender. From the Pamphlet: “VA regulations at 38 CFR 36.4354 provide the parameters for the required estate of a veteran in real property securing a VA-guaranteed loan. The lender is responsible for ensuring the loan conforms to these parameters. Generally, title to the estate shall be that which is acceptable to informed buyers, title companies, and attorneys in the community in which the property is situated.”
This is a very important feature of VA loans and something that every VA borrower should be aware of. Any restrictions on the resale of the property are not allowed by VA rules. There are very few, very specific exceptions to this rule, and if a lender attempts to put restrictions on your ability to resell the house, they must make sure you clearly understand the restrictions and accept them in writing before the loan application can even be submitted. From the VA: “Restrictions on the purchase or resale of the property are unacceptable to VA, with certain exceptions. The lender must:
- ensure any restrictions fall within the exceptions provided by VA regulations at 38 CFR 36.4308 and 38 CFR 36.4354
- consult VA where doubt exists
- obtain VA approval where appropriate, and
- fully inform the veteran and obtain his or her consent to the restrictions in writing at the time of loan application.”