When you buy or refinance a home, you have a lot of things on your mind. Chances are, title insurance isn't one of them.
Title insurance is really a two-part transaction. First, the company or attorney searches property records to ensure that there haven't been any clerical errors, mistakes in examining records, undisclosed heirs, omissions in deeds, unknown liens or fraud involving the deed, says Jeremy Yohe, spokesman for the Washington, D.C.-based American Land Title Association. It verifies that the seller really owns the property and is free to sell it.
"One out of every three searches reveals a title or public record defect that's fixed before the transaction closes," Yohe says.
Next, the entity doing the search contracts with an underwriting company to issue an insurance policy that will pay to defend you in court if anyone challenges your title and to compensate you for your equity if you lose. Homebuyers typically need two policies: an owner's policy which protects them, and a lender's policy, which safeguards the lender.
Here are six questions to ask to help you make smart choices:
1. Are the prices regulated? In many states, they are, so there won't be much of a price difference between companies.
Still, smart consumers are looking at two factors: quality of insurance and of the title search, says Ronald Mann, law professor at Columbia University in New York. The goal is to find a title company or attorney that will do a thorough search and an underwriter that will be there in 10 or 15 years if there's a problem.
Even in a regulated environment, you might be able to save money, says Orlando Lucero, vice president of Stewart Title of Albuquerque LLC. While insurance costs may be regulated, ancillary expenses like wire transfer or courier fees could add up, he says. So ask about the complete transaction price, not just insurance costs.
In unregulated areas, the difference in price "could be wide -- 10 percent, 20 percent or more," says Frank Pellegrini, president of Prairie Title Services Inc. in Oak Park, Ill. To find out if you're in a regulated area, ask your lender or state insurance department.
2. What coverage do I need? The average policy is "pretty standard," says Mann.
Owner's policies typically protect against a number of contingencies, like fraud, forgery, undisclosed heirs and spousal claims, says Pellegrini.
If you want additional coverage, that could boost the insurance cost. For example, a restriction endorsement could protect you if the construction of your home inadvertently violates the restrictions of your subdivision, Pellegrini says.