Title insurance protects property buyers and mortgage lenders against defects or problems with a title when there is a transfer of property ownership.
If a title dispute arises during a sale, the title insurance company may be responsible for paying specified legal damages, depending on the policy.
Issuing title insurance is a two-part process. First, the title company or attorney researches records to make sure there are no undisclosed heirs to the property, unpaid taxes, pending legal action, errors, fraud or other problems with the deed.
Put simply, the title must be clean, verifying that the seller really does own 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,” says Jeremy Yohe, spokesman for the American Land Title Association, a Washington, D.C.-based trade association.
Next, the title company contracts with an underwriting company to issue an insurance policy that will pay for your defense if anyone challenges your title, and compensate you for your equity if you lose.
Homebuyers typically need two title insurance policies: an owner’s policy and a lender’s policy, which protects the lender.
Here are six questions a homebuyer should ask about title insurance.
1. Are title insurance prices regulated?
In many states, they are, so there won’t be much of a price difference among companies.
Still, smart consumers should look at two factors: the quality of the insurance and the quality of the title search, says Ronald Mann, a 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 still be around in 10 or 15 years if there’s a problem.
Even if title insurance costs are regulated, ancillary expenses such as wire transfer fees or courier fees can add up, so ask about the complete transaction price, not just insurance costs.
In areas where title insurance costs are not regulated, the difference in price “could be wide — 10 percent, 20 percent or more,” says Frank Pellegrini, CEO of Prairie Title in the Chicago area.
Ask your lender or state insurance department whether you’re in a cost-regulated area.
2. How much coverage do I need?
Owner’s policies typically protect against a number of contingencies, such as fraud, forgery, undisclosed heirs and spousal claims.
Additional coverage could boost the cost. For example, a restriction endorsement could protect you if the construction of your home inadvertently violates the restrictions of your subdivision, Pellegrini says.
Or your lender might require additional insurance on the property or mortgage. For example, an adjustable-rate mortgage (ARM) endorsement guarantees that the lender is first in line for repayment if the home goes into foreclosure, Pellegrini says.
3. Who usually pays for title insurance?
The party responsible for paying for the two policies — the buyer’s and the lender’s — varies from state to state and sometimes from county to county, Yohe says. In some areas, the buyer may pay for one; the seller, the other.
That doesn’t mean that if the buyer pays, he can’t haggle over all or part of the cost. “It can always be negotiable,” Yohe says.
If you’re buying the owner’s and lender’s policies from the same company, “in many cases, there’s a substantial discount,” says Orlando Lucero, vice president of the New Mexico Underwriting Counsel at Fidelity National Title Group in Albuquerque, New Mexico.
4. Is the seller pushing a specific title company?
If you pay for the title insurance, you have the right to select the company. If you’re not paying but want to choose the company, be prepared to share some of the costs.
Be wary if the seller is pushing his title company, Mann says. A title search is meant to find errors before you buy. Use the same company that your seller did years earlier and odds are you’ll get the same results, Mann says. Often, searchers aren’t using actual records but summaries or extracts of those records. A fresh set of eyes (and extracts) could unearth problems, allowing you to fix them before you buy.
5. Whom do I trust?
If you’re getting advice from your seller, your real estate agent and your mortgage lender, look to the lender.
“The lender’s interest dovetails with yours in getting these things done well,” Mann says.
The lender is guaranteeing a large amount of money based on the assurance that the property you’re using as collateral is really yours.
6. How much reassurance do I need?
Banks and insurance companies aren’t supposed to go under, but they sometimes do. If you want to verify that the underwriter issuing the insurance policy is sound, check its financial solvency with ratings companies such as Fitch Ratings, Demotech Inc. or A.M. Best Co.
You can also research the underwriter and title company or attorney online to see what past customers are saying about their services.
Every business has its bad apples. In very rare instances, a title insurance agent has issued policies but pocketed the premiums instead of forwarding them to the underwriter, so consumers weren’t covered.
One easy solution: Contact your underwriter directly and ask for a copy of your policy.