Title Insurance: A Friend in Deed
By Anya Martin
There are titleholders in beauty pageants, spelling bees and boxing matches. But only one title matters when buying a home.
Before a sale is complete, both the bank and the borrower want to be sure that the title—the formal document that shows proof of ownership—is free and clear. That means there are no delinquent taxes, unpaid liens, undisclosed heirs or other disputes that must be resolved before the house can be sold.
A title search and title insurance protect both lenders and borrowers.
“Whether it’s a person buying their first house at $250,000 or someone buying a home at $10 million, you have to ask, ‘How devastating would it be to your life if you lost your entire investment?” says Rafael Castellanos, managing partner at New York-based Expert Title Insurance Agency.
After a house goes into contract, a title company searches public records, typically going back a number of years, to look for any problems with the home’s title. More than a third of all title searches reveal a problem, according to the American Land Title Association (ALTA), the largest trade association for title-insurance providers. The title company is able to correct some of the problems, such as an outdated survey of property lines, but some issues may have to be resolved by the seller.
Most mortgage lenders require borrowers to pay for a title search and title insurance on the loan. But this insurance policy is purchased to protect the lender—not the borrower—when unforeseen problems with the title emerge. A loan policy covers the property’s loan amount and decreases over time as the mortgage is paid off. Both the title search and the lender’s title-insurance premium are one-time fees paid by the buyer at the closing.
‘Title-insurance rates typically rise with home value. Homeowners can save by shopping around for both lender and owner policies.’
For extra protection, homeowners can buy a separate owner’s policy, says Diane Evans, president of ALTA and vice president of Denver-based Land Title Guarantee Co. This form of title insurance, which insurers often discount if purchased with the loan policy at closing, covers holders for the duration of their home ownership—even after the mortgage is paid off. Borrowers may wonder why they need an owner’s policy after the closing, but issues may come up after the house has been paid off
“For example, at the back of your yard, you planted a garden, and all of a sudden a public service company is tearing up the back fence to replace a utility line,” she explains. In such a case, title insurance may pay for repairs and legal fees to remove the utility’s easement, Ms. Evans says.
For the lender’s title insurance, the bank will typically recommend a particular title-insurance provider or list some options. Under federal law, it cannot require the borrower use that provider.
As with other types of insurance, title-insurance rates typically rise with home value, so a higher purchase price means a higher premium because it is covering more, says Daniel D. Mennenoh, president of Galena, Ill.-based H.B. Wilkinson Title Co.
In Manhattan, a lender’s policy will run about $2,607 for a $650,000 jumbo mortgage amount on a $810,000 purchase price, just above the upper threshold for government-backed loans in this high-price area (up to $417,000 in most parts of the country), Mr. Castellanos says. However, the amount could be as low as $1,825, if the property has been title-insured in the prior 10 years.
A separate owner’s policy for this property would cost $782 if bundled with a lender’s policy at closing or $3,207 if purchased on its own, he adds.
Homeowners can save by shopping around for both lender and owner policies. But since rates are regulated in all states, prices tend to be similar among reputable insurers in specific geographic areas.
While the owner’s policy isn’t mandatory, it protects the borrower’s equity interest in the property, says John Walsh, CEO of Milford, Conn.-based Total Mortgage Services. Some owner’s policies also cover appreciation if home values rise during ownership, he adds.
More considerations regarding title insurance:
• Check for conflicts. Borrowers should ensure that a lender doesn’t own or have a financial relationship with the recommended title provider, Mr. Castellanos says. Pressure from the lender to close by a specific date could cause the title company to overlook issues that could come back and haunt the owner later, he adds.
• Check solvency. Like other insurers, title insurers are graded by AM Best Company, Standard & Poor’s, Moody’s Investors Service and other rating services for their total reserves and financial record of fulfilling claims, and reputable companies typically will list these rankings on their websites, Mr. Castellanos says. “You want a rock-solid title-insurance company to issue your policy, somebody who is going to be in the business for the next 500 years.”
• What’s included. Sometimes the title company will also provide other services, such as conducting the closing, preparing and notarizing documents, so when comparing rates among providers, borrowers should ask for a breakdown of expenses, ALTA recommends.