You've found your dream home, and you're in the midst of signing documents before you get the keys. Everything is going well until you hear a phrase: title insurance. What is it? Why do I need it? Why am I just hearing about title insurance now?
These are common remarks we at Stem Lending have heard all too often from frustrated home buyers. You are at the end of your home buying process, and the last thing you want is a surprise fee that could cost you thousands of dollars. At Stem Lending, we're committed to breaking down these complex topics into their most important components, so you're armed with the information you need to save the most on your mortgage.
What is Title Insurance?
Title insurance began in the mid-19th century as a way to certify that the person selling you land did in fact own the land. It actually started as a result of a lawsuit (Watson v. Muirhead, 57 Pa. 161) in Pennsylvania's Supreme Court, in 1868.
Prior to the existence of title insurance, purchasing real estate in the US involved significantly more risk. During a property transaction, you had to establish the rights of title to a property based on public records searches or other property abstracts. The title would necessarily be cleared of any liens, rights or other issues prior to conveying (fancy word for ‘transferring') the property to new buyers or lending against the property. In reality, the risk of losing a property due to unresolved issues was still very high.
Today, title insurance protects against errors in public records, incorrect notary public acknowledgements, unknown liens or easements, or individuals who could claim property ownership but cannot be found.
Who Pays for Title Coverage?
Home buyers can buy title insurance to protect themselves, but most of the time you’re buying title insurance to protect your mortgage lender. Most lenders don’t buy their own title insurance; they force borrowers to buy it for them.
The most common arrangement, however, is that the seller pays for the owner’s policy and the buyer pays the more expensive lender’s policy.
What Are the Different Types of Title Insurance?
1. Lender's Insurance Policy
Lender's Insurance is a requirement in most states to close on a mortgage. However, the lender's policy only protects the lender up to the amount of the mortgage, and it doesn't protect your equity in the property. It will cover the following:
- Any unrecorded liens
- Defects and other unrecorded documents
- Unrecorded easements and access rights
2. Owner's policy
Owner's title insurance provides protection to the homeowner if someone sues and says they have a claim against the home from before the homeowner purchased it.
When you purchase your home, you receive a document most often called a deed, which shows the seller transferred their legal ownership, or title to their home, to you. Title insurance can protect you if someone later sues and says they have a claim against the home from before you purchased it.
Owner's insurance can be generally be bought for a one time fee and lasts as long as you or your children or relatives have an interest in the property. The premium charged varies from state to state, but historically it has been ~1% of the purchase price of the property.
Depending on the state where you purchase the policy, an owner's title insurance policy may protect the full value of your home, including your equity, for only a couple hundred dollars. In some states, home sellers will pay for owner policies to make good on the title to the buyer. And sometimes borrowers must buy it as an add-on to the lender's policy.
Here are a few examples of what is typically covered by the owner's policy:
- Title to the property
- Incorrect signatures on documents
- Forgery, fraud
- Inaccurate recording by Notaries
- Restrictive covenants
- Judgments against the property
How Does Title Insurance Work?
Unlike life insurance or auto insurance, title insurance protects against an event that happened in the past (one of the above mentioned unresolved issues). Example: If you (home buyer) have liens filed against the property, specifically for taxes that you haven't paid yet, your title insurance has nothing to do with that. However, if the tax lien is for taxes not paid by someone who owned the house 50+ years ago, then you likely have coverage under your title policy. Thanks to technology and digital record-keeping, most of these issues can be corrected very quickly and with minor due diligence.Owner's title insurance provides protection to the homeowner if someone sues and says they have a claim against the home from before the homeowner purchased it. Click To Tweet
However, most home buyers today still pay > $1,500 for title insurance, even though the above process still hasn't really changed since the late 1800's. Today, you're still paying someone (a title company or a lawyer) to go to the courthouse, search your property against all public records to find any existing liens, easements, or issues that could prevent you from owning the place free & clear.
If you're locking-in a mortgage to buy your home, it's highly likely your lender will require you to purchase a policy to protect its interest in the property. If the property title turns out to be invalid, the lender’s policy will reimburse the lender for the outstanding mortgage balance.
Why Does Title Insurance Cost so Much?
Again, unlike life insurance, home insurance or auto insurance companies, title insurance companies usually pay only pay around 3 or 4% of their premium dollars on claims (vs. the ~80% from the others types of insurers).
That means 95% of their revenue goes toward operating expenses, which are minimal at least as they relate to insuring a title and paying claims, but end up rising and falling in lockstep with revenue. Title insurance agents do often handle the task of searching through and analyzing public documents, sometimes going back many decades. But in many states, consumers pay separate fees to the agents for that research, on top of the premiums.
The title insurance market is also largely controlled by four companies who account for 80-90% of the industry's volume.
What Does Stem Lending Recommend?
Rather than shopping around, most people accept title insurance choices made for them by a real estate agent, mortgage company or builder. This is also true for people's mortgage search. Our advice: shop around!
- Research title closing costs online and check whether there are fees on top of the premium.
- If you are refinancing, make sure you get the discount that often applies to such transactions.
- Understand that title insurance fees can vary widely around the country, especially where states have a state-run agency that regulates insurance rates.