On average 40% of home buyers every year are first-timers. That’s hundreds of thousands of buyers that have no clue what title insurance is, why they need it, or why they should even care. Let’s get a definitive answer as to what is title insurance shall we? Then, all you first-timers (and most of the rest of us home owners) can rest easy knowing what the heck this is and why you need it.
Ask a Title Company, not a Realtor
Before you say anything, touche’, I am a Realtor explaining title insurance… but in my defense, I’ve learned what it is from qualified closing agents within reputable title companies. My point is this, when you hire a Realtor, let them explain agency to you but let a Title company explain a title policy and title insurance. Let it ‘come for the horses mouth’ so to speak.
What is Title Insurance?
The definition of title insurance is this:
Indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens.
Title insurance arose out of a deficiency in land records laws. Basically, poor records have been kept, and poor systems have been in place over the years that allowed for previous owners and lienholders to capitalize on a transfer of ownership. Title insurance protects (for the most part) the owner from things that a title search or abstract may miss.
Note: Most institutional lenders require a title insurance policy to protect their interest and allow a mortgage on the property.
Types of Policies
An owner’s policy insures that the title is vested in the purchaser and that it is free from defects, liens and encumbrances. Unfortunately, like most insurance policies, title policies come with exceptions. This means that you should read your policy carefully to determine what types of liens, encumbrances, and defects may NOT be covered by the policy. There are some newer policies available that companies call “enhanced title policies” which have less exceptions. These generally cost about 10% more than traditional policies. While it may be customary for a certain party to pay for the title policy… it is negotiable.
Lender’s Policy or Loan Policy
This is issued only to mortgage lenders. It usually follows the assignment of the mortgage loan so it benefits the purchaser of the loan if it’s sold. This helps to facilitate the sale of mortgages on the secondary market.
What’s It Cost?
Most states regulate the price of title insurance premiums. My experience has been in Arkansas so I will tell you what our policies cost but I recommend calling a local title or closing company directly if you want to know.
In Arkansas, if one title company handles the closing then you can save money by purchasing a combo title policy. You can also save a good deal of money if the seller can bring the previous policy to closing. Here are some example prices:
- $50,000 policy = $350
- $100,000 policy = $560
- $200,000 policy = $805
- $300,000 policy = $990
- and so on…
What are my rights?
RESPA (The real estate settlement procedures act) entitles homeowners to choose their title insurance company when making a purchase or refinancing residential property. Typically, homeowner leave it up to a bank or attorney but they do have the choice. Commercial real estate transactions are not within the scope of RESPA so they are the exception to the rule.
If you have further questions about what title insurance is, what it covers, and exactly how much it will set you back you need to contact a title professional who can tell you the specifics. If you need a short list of reputable and friendly title professionals, contact me, and I will email you some local closing agents’ information.