Joe Gentile is an attorney at Federal Title & Escrow. He has practiced real estate law in the D.C. metro area since 2000.
If you’re like most homebuyers, the topic of title insurance rarely (if ever) appears on your radar. It’s an afterthought for most, another detail your real estate agent or mortgage lender handles sometime between when the offer is accepted and when you receive the keys to your new home.
But you shouldn’t overlook this important step in the home-buying process. Title insurance protects your monetary stake in your home should someone else make a claim of ownership to your property after closing. But that’s just the tip of the iceberg. By understanding what title insurance is, how it works and why you need it, you can ensure you’re adequately protecting your real estate investment without spending more money than you have to.
You choose your title company.
Federal law grants home buyers the right to choose their title service provider. Many home buyers don’t realize they have a choice. They just go with whatever company their real estate agent recommends. The Consumer Financial Protection Bureau has been cracking down lately on the cozy relationship some agents have with title companies. One realty broker recently was fined $500,000 for its referral-fee arrangements and inadequate disclosures to consumers. While getting title company recommendations from a real estate agent can be useful, the home buyer should be aware that, more often than not, a real estate agent is encouraged by their broker to refer home buyers to a title company that is affiliated with the real estate broker.
Roughly 70 percent of variable closing costs are title related.
Depending on the company you choose, settlement costs can differ by $1,000 or more, which is why it pays to shop around. Title insurance premiums and service fees can vary widely, depending on the underwriter and title company. Most title companies in the D.C. metro area offer a closing costs calculator on their Web site, which makes it easy to compare rates.
There are two kinds of policies. One is optional.
Your lender will require you to secure a lender’s title insurance policy. That’s because the bank wants to ensure its loan is protected from title claims. There’s a second, optional policy known as the owner’s title insurance policy, which most home buyers choose to purchase as well.
When you purchase both policies, you receive a Simultaneous Issue Rate. Many homebuyers don’t realize they’re receiving this special rate and are surprised to see how expensive a lender’s title insurance policy becomes when they opt out of the owner’s policy.
The savings of opting out of the owner’s title insurance policy compared to the assumed risk of not having one is the reason most home buyers choose to purchase both.
Ask about “limited” title insurance vs. “enhanced” title insurance.
Title insurance policies for home buyers come in two levels of coverage. As you can probably guess, one is more expensive than the other. But what you may not know is it’s not always necessary to choose the more expensive policy.
The limited policy, also known as a standard policy, covers issues that should have been identified and resolved prior to closing, such as forgery or fraud or a third-party who claims interest in the property. The enhanced policy covers many more pre-closing issues as well as a host of post-closing issues that can arise such as building permit violations, encroachments, contractor liens, or post-closing fraud, forgery and identity theft.
Compare standard versus enhanced title insurance, and make sure you know which policy is reflected in your closing costs quote. Talk with your title company to determine which policy is most appropriate for your home investment.
Closing cost discounts do exist.
While you shop rates and companies, ask about something called a Reissue Rate discount. This discount is dependent upon the insurance underwriter as well as where the property is located, but it can lower the cost of your policy premium by as much as 40 percent.
Generally speaking you’ll need to furnish a copy of your seller’s existing (owner’s) title insurance policy. If this isn’t possible, your chosen title company may be able to locate a copy through an industry database. Additionally, the existing policy issue date typically can’t exceed a certain length of time. This can be anywhere from seven to 12 years, again depending on the underwriter.
Your lender will require a new title insurance policy for your refinance
When you refinance, your lender basically pays off the original loan and then grants you a new loan that requires its own title search and title insurance policy. So as you crunch the numbers to determine if refinancing is worth it, keep in mind that your lender will require a new title insurance policy to be issued, and be sure to factor the lender’s title insurance premium in those closing costs. (And don’t forget to inquire about a Reissue Rate discount.)
Read Joe Gentile’s previous blog posts