Title insurance

Title Insurance

Title insurance.

Title insurance protects your lender's interest in your home and real property in case its ownership is contested in court.

Before you close on any property purchase, your lender will require a title search -- an examination of all the property records by an attorney or title company, to ensure that the seller owns the property and has the right to sell it.

But just in case something is not revealed in the title search, your lender will usually require you to obtain title insurance as added protection until you have paid off your mortgage. You may also choose to purchase additional insurance to protect your own title and claim to the property.

Usually, you pay for title insurance as a one-time cost at closing. While some states regulate title insurance costs, others don't.

title insurance

A policy issued by an insurance company to cover defects in legal title to real property,including liens and other adverse claimants. All institutional lenders (everyone except individuals and small private lenders) require title insurance in connection with their loans. One may buy the basic,no-frills policy or add riders for additional protection and higher premiums. (The standard title insurance policy written for closing protects only the lender;owners should request owner coverage in addition.)

Commercial borrowers comparing lending costs among providers should inquire about the standard riders required by each lender: a large number of riders can dramatically increase closing costs and may make the difference in a decision between two lenders. Riders (also called endorsements), can address some of the following:

• Inflation
• Problems with restrictions, encroachments, and minerals
• Zoning problems
• Separate tax parcel problems if the tax parcel includes land in addition to that being mortgaged
• Losses if it turns out the land does not abut a public street
• Last dollar coverage, meaning that if the loan is secured by real property and personal property, borrower payments will be treated as if made to personal property first, so that the lender's real property title insurance is not reduced simply by virtue of loan payments
• Usury, so that if a court rules that the mortgage is invalid because the note's interest rate is too high and violates state usury laws, the title insurance will pay the lender
• Environmental protection, in case a government authority files an environmental protection lien that gains priority over the mortgage
• Going-concern value measure of damages for an operating business, rather than simply the value of the real estate measure of damages

Title Insurance

Insurance against loss arising from problems connected to the title to property.

A home may go through several ownership changes and the land on which it stands through many more. There may be a weak link at any point in that chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.

Lender Versus Owner Policies: All mortgage lenders require title insurance to protect their lien against the property. Alender policy is for an amount equal to the loan and lasts until the loan is repaid. As with mortgage insurance, the borrower pays the premium, which is a single payment made upfront.

To protect his or her equity in the property, the owner needs an owner's title policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy. It is advisable to do this because the additional cost above the cost of the lender policy is relatively small.

Coverage Period: With the exception noted below, title insurance only protects against losses arising from events that occurred prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future.

On a title policy, the owner's protection lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property. When they sell, however, the lender will require the purchaser to obtain a new policy. That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy.

Extended Coverage: The standard title insurance policy provides no protection against false claims that arise after the property is purchased. Yet such events occur. Identity theft can result in a new mortgage the owner knows nothing about. Or a neighbor could build on the land without the owner's knowledge and, after a period without challenge, could acquire ownership rights.

A new policy is available in most states that protects against such contingencies. It is usually referred to as the ALTA Homeowner's Policy. It may cost a bit more than the standard policy.

Title Insurance on a Refinancing: A borrower who refinances does not need a new owner's policy, but the lender will require a new lender policy. Even if the borrower refinances with the same lender, the lender's policy terminates when the old mortgage is paid off. Furthermore, the lender is concerned about title issues that may have arisen since the purchase. However, insurers generally offer discounts on policies taken out within short periods after the preceding policy. In some cases, discounts are available as far out as six years from the date of the previous policy.

Cost Structure of Title Insurance: Because title insurance protects against what may have happened in the past, most of the expense incurred by title companies or their agents is in loss reduction. They look to reduce losses by finding and fixing defects before the policy is issued, in much the same way as firms providing elevator or boiler insurance. These types of insurance are very different from life, property, or mortgage insurance, which protect against losses from future events over which the insurers have no control.

Cross-Subsidization: The cost of providing title insurance is not much different for a small policy than for a large one. The reason is that most title insurance costs arise in preventing loss rather than paying claims, and prevention costs are not related to the size of a policy. Despite this, premiums are scaled to the amount of coverage, the amount of the mortgage, or the value of the property, which suggests that smaller policies may be underpriced and larger policies overpriced.

Geographic Variations in the Cost of Title Insurance: The cost of title insurance varies widely from one area to another. One major reason is that the services covered by the title insurance premium vary in different parts of the country. In some areas, the premium covers not only protection against loss but also the costs of search and examination, as well as closing services. In other areas, the premium covers protection only, and borrowers pay for the other related services separately.

To complicate it further, in some states the charges for title-related services are paid to title insurance companies, which perform the functions but charge separately for them. In other states, borrowers may pay attorneys or independent companies called abstractors or escrow companies.

Of course, what matters to the borrower is the sum total of all title-related charges. These also differ from one area to another in response to a variety of factors. The 50 states have 50 different regulatory regimes, which affect charges. So do local costs, competition in local markets, and other factors.

Shopping for Title Insurance: Most borrowers leave it to one of the professionals with whom they deal—real estate agent, lender, or attorney—to select the title insurance carrier. This means that competition among title insurers is largely directed toward these professionals who can direct business rather than toward borrowers.

Borrowers may be able to save money by shopping for title insurance themselves, although it is difficult to generalize because market conditions vary state by state, and sometimes within states. I would certainly shop in states that do not regulate title insurance rates: Alabama, District of Columbia, Georgia, Hawaii, Illinois, Indiana, Massachusetts, Oklahoma, and West Virginia.

There is no point shopping in Texas or New Mexico because these states set the prices for all carriers. Florida also sets title insurance premiums but not other title-related charges, which can vary.

In the remaining states, the situation is murky and it may or may not pay to shop. Insurance premiums are the same for all carriers in “rating bureau states”: Pennsylvania, New York, New Jersey, Ohio, and Delaware. These states authorize title insurers to file for approval of a single rate schedule for all carriers through a cooperative entity. Yet in some there may be flexibility in title-related charges. More promising are “file and use” states—all those not mentioned above—which permit premiums to vary among insurers.

It is a good idea to ask an informed but disinterested local whether it pays to shop in the area where the property is located. Just keep in mind that those likely to be the best informed are also likely to have an interest in directing your business in the direction that is most advantageous to them.