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Title Insurance: In Deed It Matters

By Steve Matthews

Wednesday, July 1st, 2015

Before a sale is complete, both the bank and the borrower want to be sure that the title—the formal document that shows proof of ownership—is free and clear. That means there are no delinquent taxes, unpaid liens, undisclosed heirs or other disputes that must be resolved before the house can be sold.

A title search and title insurance protect both lenders and borrowers.

After a house goes into contract, a title company searches public records, typically going back a number of years, to look for any problems with the home’s title. More than a third of all title searches reveal a problem, according to the American Land Title Association (ALTA), the largest trade association for title-insurance providers. The title company is able to correct some of the problems, such as an outdated survey of property lines, but some issues may have to be resolved by the seller.

Most mortgage lenders require borrowers to pay for a title search and title insurance on the loan. But this insurance policy is purchased to protect the lender—not the borrower—when unforeseen problems with the title emerge. A loan policy covers the property’s loan amount and decreases over time as the mortgage is paid off. Both the title search and the lender’s title-insurance premium are one-time fees paid by the buyer at the closing.

As with other types of insurance, title insurance rates typically rise with home value, so a higher purchase price means a higher premium because it is covering more. Homeowners can save by shopping around for both lender and owner policies. But since rates are regulated in all states, prices tend to be similar among reputable insurers in specific geographic areas.

For the lender’s title insurance, the bank will typically recommend a particular title insurance provider or list some options. Under federal law, it cannot require the borrower use that provider.

While the owner’s policy isn’t mandatory, it protects the borrower’s equity interest in the property. Some ‘enhanced’ owner’s policies also cover appreciation if home values rise during ownership.

More considerations regarding title insurance:

• Check for conflicts. Borrowers should ensure that a lender doesn’t own or have a financial relationship with the recommended title provider. Pressure from the lender to close by a specific date could cause the title company to overlook issues that could come back and haunt the owner later.
• Check solvency. Like other insurers, title insurers are graded by Standard & Poor’s and other rating services for their total reserves and financial record of fulfilling claims, and reputable companies typically will list these rankings on their websites. You want a rock-solid title insurance company to issue your policy, somebody who is going to be in the business for the next 100 years.
• hat’s included. Sometimes the title company will also provide other services, such as conducting the closing, preparing and notarizing documents, so when comparing rates among providers, borrowers should ask for a breakdown of expenses.