Understanding and Shopping for Title Insurance
If you buy or refinance a home, you're going to need title insurance. And if you're going to get title insurance, you ought to understand what you're getting.
Title insurance is something that practically every homebuyer gets, but few really understand. Most people know that it ensures that you have clear title to the property - that there are no previous liens or other claims upon the property at the time of purchase. But there's more to it than that.
For example, many are unaware that, at its most basic level, title insurance protects the lender, not the homebuyer. Or that there are different types of coverage available, including various levels of protection for owners. Or that you can shop around for your coverage.
What title insurance does
When you get title insurance, the main thing you're paying for is for is an investigation by the title company to make sure the deed is clear - to verify that the current owner has the right to sell the property and that there are no liens, claims or other encumbrances on it. Although the title company will pay off if it turns out that there was an undiscovered problem with the deed, their primary focus is to make sure that never happens - and that's what you're paying them to do.
In addition to clear title and liens against the property, title insurance also checks for a number of other issues that might interfere with the buyer's rights to the property - including easements, use restrictions or covenants, errors in recording the deed and judgments against the property.
An important thing to remember about title insurance: although you, the homebuyer, are paying for it, title insurance actually protects your lender. That's why lenders require it before issuing a mortgage or refinancing an existing one - it protects their interest. So if a problem with the deed pops up, their financial stake is still protected.
In the case of refinancing an existing mortgage, the title company checks for any liens or encumbrances that may have arisen since the original purchase - such as a home equity loan, lien for unpaid taxes or divorce settlement, for example.
The need for homebuyer's insurance
Lender's insurance only pays off the mortgage balance still owed the lender. If you, as the buyer, want to be protected, you need to buy homebuyer's insurance, which extends the coverage to you as well. The additional cost is fairly minimal, so it'd a good thing to have. In some parts of the country, this is traditionally paid for by the seller; in other areas, it's considered the buyer's obligation if he or she wants to have it.
However, there are some things that basic homebuyer's protection does not cover. For one, standard title insurance only protects against undiscovered claims that were made before the sale - they do not apply to claims that may arise after you purchase the property - such as if a subcontractor files a claim against your newly built home after the purchase date.
To guard against events like these, you can purchase expanded coverage, known as Homeowner's Policy of Title Insurance, which covers issues that may arise after the purchase. These include such things as zoning or building permit violations by previous owner, fraudulent liens filed against the property, a neighbor building on your property or otherwise taking it for their own use, or similar situations that would not be discovered in the title search.
Shopping for title insurance
Most borrowers do not arrange for their own title insurance. Typically, the real estate agent selects the title company in the case of a home purchase or the lender in the event of a mortgage refinance. However, as a borrower, you have the right to choose your own title company. Under the federal Real Estate Settlement Procedures Act (RESPA), a borrower cannot be required to use a particular title company as part of obtaining a home loan or closing a residential real estate deal.
Whether you choose to shop around for a title company or not depends largely on where you live. In Florida, New Mexico and Texas, rates for title insurance are set by the state, so there's no variation in price from company to company. Other state may not regulate title insurance fees at all.
In some other states, including New York, Pennsylvania, New Jersey, Ohio and Delaware, the basic insurance rates are set by the state, but fees for "services" - such as the title search and investigation - are not, and so can result in differences from company to company.
The typical cost of title insurance is about $700, but this can vary greatly from state to state. This is in part due to differences among the states in what is covered by title insurance - in many states, the title insurance company also handles the closing, or settlement process, so that cost is included. In others, an attorney or escrow company many handle the closing.
Know what services are included
If you do shop around for title insurance, you want to make sure to know which services are included in the fee or required by the state. A title company should be able to tell you this. Fees may include handling the closing and making sure the necessary payments are made to the various parties; document preparation and notary fees, policy endorsements and others.
Be aware too, that rates may vary depending on the circumstances of your mortgage; many title companies offer discounted rates on refinances or on home purchases where the property previously changed hands within the past few years.
The savings you find from shopping around may not be great - perhaps only $150 or so - but if you're paying the closing costs separate from the loan, it's a difference you'll notice. Even more important, though, is knowing what kind of coverage you're getting, so your interest in your home is protected in the event problems should crop up.