"I sure love paying thousands for title insurance!" said no one, ever. Title insurance is one of the more expensive mortgage closing items, often adding thousands of dollars to the cost of buying or refinancing property. Its value is rather hotly debated these days – some think that with most property records being housed electronically in public databases, title insurance isn't really necessary. Few have heard of anyone who has actually had a title insurance claim, and experts estimate title insurance payouts comes to just five percent of premiums, while home and auto companies pay out approximately 80 percent!
Why Title Insurance Still Matters
Unfortunately today, title insurance is still a necessary evil, and not just because mortgage lenders require it. For example:
- Even though documents today are recorded and stored electronically, it hasn't always been that way. A property might have improperly changed hands 50 years ago – and one thing we all know about high tech solutions is "garbage in, garbage out."
- Mortgage and real estate fraud is alive and well, according to the FBI.
- The huge number of foreclosures and robo-signings just a few years ago means that there are a lot of transactions that could be suspect.
Sloppy foreclosures have clouded many a modern title in the last decade. In a landmark case in Massachusetts, U.S. Bank v. Ibanez, the Massachusetts Supreme Judicial Court informed a foreclosing lender and the purchaser of the foreclosed home that a procedural error invalidated the foreclosure and subsequent sale. The home was returned to the owner who had defaulted on the mortgage. Considering that about half of distressed property sales are all cash transactions (which don't require title insurance), experts note that there are a lot of potential title problems in circulation today.
There's also mortgage fraud. It can involve identity theft or document forgery, says the FBI, in which con artists steal homes (on paper) and then resell them to unsuspecting buyers. Finally, there are potential problems with new construction when the builders encounter financial difficulty. Checking the title yourself won't help you if the liens are filed after you complete the sale – but title insurance protects you from the claims of creditors who show up late to the party.
There are two kinds of title insurance policies. The lender's policy is required if you finance your purchase. It is usually based on the dollar amount of your mortgage, not the property value. It protects the lender's interests in the property in case a problem with the title arises – meaning the insurer could simply reimburse the lender for its losses, while doing nothing to keep you from losing the property.
The owner's policy protects your interest for as long as you own the property. It's not required, so you can decide to add it (or not) for your own protection. Only an owner's policy protects your interest if issues like these arise:
- Faulty deeds
- Mistakes in examining records
- Undisclosed heirs
These real life situations illustrate why title insurance is still necessary:
- A man died without a will and his house was inherited by his only son, who subsequently sold the property. Later, a second son entered the picture – with an enforceable claim to the home.
- A creditor had a valid lien against a house, but there was a recording mistake by the county – the lien was discovered after the sale closed.
- A real estate scammer borrowed against his many properties and then forged and filed lien releases from the lenders. He sold off the homes to buyers while there were valid mortgages against them.
Don't Pay Too Much
While it's risky to save money by omitting title insurance, you should do what you can to pay less for your policy. Your lender may have an insurer it prefers, but you're the one paying for it, so it's your choice. Title companies typically get very friendly with lenders and real estate agents, not so much consumers. There are definitely opportunities for conflicts of interest. Compare title insurance rates and escrow fees the way you (hopefully!) are doing for your mortgage.
Fees and rates can vary a lot or a little between providers – it depends on how competitive the local market is and how your state regulates title insurers. In many cases, you can get a discount.
- Buy both the lender's policy and owner's policy together.
- Ask about a short-term or reissue rate if you're refinancing. It may be five to 60 percent lower than the standard insurance rate.
- Shop for competitive rates if your state allows it. In some areas, the government sets title insurance rates, but in others insurers are allowed to compete on price. And even states that set title insurance rates may allow you to compare fees for escrow and other mortgage closing costs.
- In some locations, it's customary for buyers and sellers to split the insurance charges. Even if it isn't in your area, it can't hurt to ask.
When shopping for title insurance, you may have to call several providers and choose the one with the best deal. Today, though, it's not difficult to get title insurance quotes online. The State of Nevada, for example, has a site that enables consumers to compare lenders and owners policies as well as escrow fees. Many insurers offer quotes online, which can be compared.