Understand title insurance before you buy your next home and save yourself money and aggravation.
Most people who have been through the home buying process probably aren't shy when it comes to sharing their feelings on title insurance... it's a big pain.
After all, 1) It's often the biggest expense in your closing fees, and 2) there's only a slim chance that you'll ever need to use it.
Still, most lenders require it. And even though it might seem like a "money for nothing scam," on the off chance that you actually have an issue with your title, you'll be glad that you purchased it because it could literally save your house.
So, what is title insurance?
At its most basic, title insurance protects the lender and sometimes the owner from possible loss of the property if someone else claims ownership on after the closing.
Before there was title insurance, anyone who purchased real estate was responsible for making sure that the title held by the seller to the property was valid. If it was proven to be invalid later on, the buyer would lose the property.
What title insurance basically protects against is any defects in the title that exist in the public records at the time of the purchase or refinance of your property. Title defects can include:
- Errors or omissions in deeds
- Mistakes in examining records
- Forged signatures
- Undisclosed heirs
- Missing heirs
- Liens for unpaid taxes
- Liens by contractors
While title insurance protects your lender, it does not always protect you, the homebuyer, unless you buy extra coverage.
That said, there are really two types of title insurance:
1) Home Lender's Policy: This policy protects the lender in a title dispute. The policy lasts for the term of the mortgage.
2) Home Owner's Policy: As the name implies, this policy protects the homeowner during title disputes. This policy is issued on the full, purchase price of the home (i.e. renovations are not included) and covers any legal fees for defending the claim to the title. This policy lasts as long as the homeowner and his or her heirs own the property.
What do title companies do?
Before issuing a policy, a title company will check for any title defects by researching public records including:
- Divorce decrees
- Court judgments
- Tax records
The point of the title search is to determine who owns the property, if it has any outstanding debts, and what condition it is in.
What does it cost?
On average, title insurance costs anywhere from $1000 to $2500 and it is a one-time cost.
But you aren't just paying for your insurance. You are also paying for the fees, which include the title search, premium, closing, and examination fees. While most states regulate the premiums for title insurance, the fees are not regulated and are often negotiable.
If the property was bought or refinanced in the last five years, you may qualify for a short-term or reissue rate which can be anywhere from 5%-60% less. Be sure to ask for reissue rates, because your lender might not bring them up. It's shady, but there's much less commission to be earned on a cheaper insurance, so your officer may not bring it up.
It's worth it to ask the seller if they will pay for your title insurance. Sometimes they will and in that case, it's much better than having to negotiate the fees.
Can you pick your own title insurance company?
While your lender might strongly encourage you to go with their title insurance company, a federal law called the Real Estate Settlement Procedures Act says that you have the right to choose your own insurance company. In fact, it's unlawful for a bank or lender to mandate that you use a particular insurer.
While everyone would like to avoid paying for title insurance, there's just no way around it. While the actual insurance rates are generally set by your state, most companies will charge the maximum and see how much they can get away with in terms of the fees. Shop around for the best deal and question your fees and you might be surprised by how much you can save.
Also, these days when banks are foreclosing on homes right and left, reselling them, and then having the foreclosures disputed - it's a good idea to protect yourself from somebody else's mistakes!