Title insurance is important when you buy a house because you need to insure that what you buy is actually going to be officially and legally yours on record. This post will review what is title insurance and how much does it cost.
A title policy ensures that the property isn’t encumbered by past liens or other problems – such as a forged title and ineligible or incompetent parties to a previous deed – that could affect the transfer’s legality or result in future financial costs.
When my parents tried to sell their farm in Oahu, there was a complicated easement in their front driveway from the neighbor they really didn't know about. This easement made the property harder to sell, but getting title insurance helped eased fears.
In most cases, lenders and buyers purchase separate title insurance policies, each protecting their respective interests in the property. Title insurance is typically included as a closing cost in a real estate transaction.
Whether you’re buying an older home or a new construction house, you’re likely to require a title policy if you are taking out a mortgage.
But if you are paying all cash for a home, then you are not required to take out title insurance. That said, it's still a good idea to get title insurance for your own peace of mind.
How Does Title Insurance Cost?
The average cost of title insurance is around $1,000. The cost will depend on title insurance company and state by state.
Title insurance costs are typically split into two broad categories: premiums and service fees. Within each category, costs can be further split based on the amount and type of work required to underwrite and fulfill the policy.
Premiums
The actual premium paid on a particular title insurance policy depends to some degree on the value of the underlying property. However, since the bulk of the policy’s cost covers pre-transfer work – title search, examination, and curing defects – property value isn’t the most important factor.
Here are some other factors that affect premiums:
- Amount of work necessary to maintain accurate, up-to-date information on the covered property and adjacent properties (known as title plant)
- Amount of work necessary to conduct a thorough title search and examination
- Legwork required to cure any defects or adverse interests
- Expected cost of compensating the insured party for any title defects
The average title insurance policy cost of $1,000 covers all upfront work and ongoing legal and loss coverage.
Premium Regulation
Title insurance regulations vary substantially from state to state. In some jurisdictions, authorities tightly regulate premiums, severely limiting how title insurers can structure their policies – how much they can charge, regardless of the factors outlined above. In other jurisdictions, premium regulation is lighter, and insurers have more leeway to set rates.
Common forms of premium regulation include the following:
- Oversight Only. In this scheme, regulatory authorities monitor title insurance premiums from year to year, but take no direct action to set acceptable rates or ranges. However, if the authorities determine that a particular insurer is charging unfairly high premiums, undercutting the competition, or exercising monopoly power over the local industry, they reserve the right to fine the offending insurer or institute premium controls. Example states include Georgia and Illinois.
- Promulgation. Regulatory authorities convene on a regular basis to evaluate the state of the local title insurance industry and set premium rates or ranges that reflect this. Example states include Texas and New Mexico.
- Prior Approval. Each title insurer operating in the state, or a local trade organization representing multiple insurers, must propose new rates to local regulatory authorities on an annual basis. These rates can’t be charged until explicitly approved by the authorities. A related standard, known as “file and use,” requires insurers to file new rate schedules with regulatory authorities, and then wait to implement them until notified that they won’t be adjusted. Example states include New Jersey and New Hampshire.
- File-and-Use. This is a lighter, less common standard that allows insurers to change rates as they see fit, as long as they simultaneously file notice of the change with regulatory authorities. If the authorities deem the new rates unfair upon review, they reserve the right to adjust them. As of mid-2015, the only use and file state is Wisconsin.
Why Does Title Insurance Exist?
Title insurance exists because property owners had no legal recourse against invalid or fraudulent land titles prior to the mid-19th century. Back then, it fell squarely on buyers to ensure that their title was valid. This was an arduous, time-consuming process that was practically impossible in vast frontier states with poor roads and centrally located, and sometimes poorly maintained, land records.
This unhappy state of affairs was challenged and upheld in the landmark Watson v. Muirhead case, heard by the Pennsylvania Supreme Court in 1868. The court ruled that Muirhead, a Pennsylvania conveyancer (real estate transfer professional), couldn’t be held liable for relying on a lawyer’s erroneous opinion that a particular title was clear of encumbrances.
In reality, the title had a preexisting lien that the examining lawyer had failed to discover, resulting in severe financial distress for the buyer.
Outraged by the decision, landowners lobbied the Pennsylvania State Legislature to intervene. In 1874, the body passed a law permitting title insurance.
In 1876, the first title insurance company was incorporated in Philadelphia. Other states followed suit, and the rest is history.
Types of Title Insurance
Title insurance comes in two basic forms: lender (also known as “loan”) policies, and buyer policies. Lender policies protect the mortgage lender’s interest in the property, which usually decreases over time. Buyer policies protect the buyer’s interest, which usually increases with time.
Lender policies remain in force for the life of the mortgage loan or until the initial mortgage is refinanced, at which point a new lender policy is issued. Buyer policies remain in force for as long as the buyer retains an interest in the property.
What Title Insurance Covers
Title Search
Though title insurance policies vary from state to state and provider to provider, they always cover the cost of conducting a title search. A title search is a thorough examination of relevant public records to determine whether any problems exist with the title. These records are typically held with the city or county where the property is located.
Ideally, a title search looks at the entire history of a property, stretching back to its original platting or subdivision. This is generally done by scrutinizing the property’s abstract – a document containing the complete chain of ownership and historical liens.
However, since abstracts can be incomplete or contain erroneous information, a comprehensive title search typically relies on other sources of information, such as local tax records, previous owners’ wills, and applicable court judgments.
Curing or Resolving Problems
Title insurance policies also cover the cost of resolving (also known as curing) most title problems (also known as defects) uncovered during the title search. Common defects include, but are not limited to, the following:
- Tax liens (for unpaid taxes)
- Construction liens, also known as mechanics’ liens (for unpaid construction or renovation bills)
- Creditor liens (for instance, an unpaid balance on a preexisting mortgage)
- Court judgments (for instance, a post-divorce judgment awarding part of the property to a former spouse)
Note that if the title search uncovers egregious problems with the title – such as evidence that the property is wholly owned by a third party and thus not marketable by the current seller, that one or more transfer instruments was forged, that an incompetent party (such as a minor) was involved in a previous transfer, or that there is no right of access to the land – the lender may refuse to issue a mortgage on the property and the buyer may be forced to walk away.
Legal Costs and Loss Compensation
Finally, title insurance policies cover future costs arising from title disputes. For instance, the holder of a valid title insurance policy wouldn’t have to pay out-of-pocket to defend against a lawsuit brought by contractors claiming that their companies had liens on the property stemming from a previous owner’s unpaid renovation bill.
In the relatively rare event that a court rules the most recent transfer of the property is invalid – for instance, if it’s discovered that a previous owner deeded the property to a third party in a hitherto-undiscovered will – the policy also compensates the policyholder for any loss of equity in the property.
A title insurance policy’s coverage limit is usually equal to the property’s assessed value at the time the policy is issued, unless the policyholder purchases additional coverage.
Title Insurance Is A Must
Buying a home will likely be your single largest purchase you'll ever make. Real estate is one of the oldest ways people have been able to build wealth over time.
If you are buying an old home with many past owners, getting title insurance is a must. You just don't know for sure the history each home has. Title insurance protects you from unknown situations.
If you are buying an old home with one owner, you are relatively safer from risk. But then again, you never know as the homeowner might have taken out a reverse mortgage with a claim by the bank.
Even brand new construction is not a guarantee. The real estate developer might have some liens against its own business.
Title insurance is worth the average $1,000 cost. Don't mess around when it comes to buying or selling property. Go with the title insurance company recommended by the lender since your interests are aligned.
The seller of the property has to go through a title insurance company as well. Make sure you look up the company and assess the company's reputation, history, and personnel.
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