title insurance [ˈtī-təl – in-ˈshu̇r-ən(t)s]
Insurance against loss due to an unknown defect in a title or interest in real estate. In other words, title insurance covers past title problems that come up after you buy or refinance a property.
It depends on local custom. In the DC metro area traditionally it is the homebuyer who pays for title insurance and title services.
Because the person who pays for the policy selects the title insurance company, it is the homebuyer’s right to shop for and choose the title company and closing agent that will process closing.
Yes and no. If you’re taking out a loan to purchase your home, the mortgage lender will require you to purchase what’s called a lender’s title insurance policy, also known as a loan title insurance policy, because it protects the lender for the full amount of the home loan.
A second kind of title insurance policy, known as the owner’s title insurance policy, is optional. Owner’s title insurance protects the homebuyer for the full amount of the property’s value. Most real estate professionals advise in favor of purchasing owner’s title insurance protection. Find out why on the next slide.
Unlike most types of insurance we buy to protect us in the future, title insurance covers past title problems that come to light after you’ve closed on your home. Lost, forged or incorrectly filed deeds as well as property access issues and liens on a property are a few examples of title issues that may not be identified at the time of closing.
In the grand scheme of things, purchasing an owner’s title insurance policy is a matter of a few to several hundred dollars more paid at closing, while the risk of forgoing the protection is a loss in the hundreds of thousands – to potentially millions of dollars range.
Without an owner’s title insurance, you may be on the hook for the legal expenses and other costs to settle the dispute. Even worse, if you’re unsuccessful at defending title, you could lose your home and all cash invested in the home. An owner’s title insurance policy means your biggest asset has the backing of a multi-million dollar insurance underwriter and its legal department – should anyone make a title claim, you will be covered and compensated for any losses at no additional cost.
You’ll have the option to choose between two types of owner’s title insurance policies, and you can wait all the way up until the day of closing to make your final decision.
The Standard policy is sufficient for the majority of cases. It covers issues that should have been identified and resolved prior to closing.
For an additional 20% an Enhanced policy is also available. It includes the same coverage as the Standard policy as well as a number of post-closing issues.
An Enhanced owner’s title insurance policy is not always necessary, so talk to your title attorney or closing agent to help you decide the appropriate level of coverage for your real estate purchase.
READ MORE: STANDARD V. ENHANCED – COMPARE POLICIES
Not necessarily. Title insurance underwriters are required by law to file their rates with the states where they insure title. Therefore, title companies who are agents of the same underwriter will charge the same title insurance premium.
(Title insurance premiums are a different charge from title service fees, which we’ll cover in just a moment.)
There are several title insurance underwriters all over the country that insure title, and they don’t all file the same rates. Sometimes title companies become agents of multiple underwriters, using one title insurance underwriter for one jurisdiction while using a second underwriter for policies in another, etc.
This is another reason we encourage homebuyers to shop several title companies before making a final selection.
Title company fees are not regulated by state or local government (yet). Because title companies differ in their operational costs and losses experienced (i.e., title claims paid), service fees vary. In the DC metro area, title company fees vary by as much as $1,000 more more.
This is yet another reason we encourage homebuyers to shop several title companies before making a final selection.
State insurance commissioners require title insurance underwriters to file their rates every year, and then title companies are bound by the same rates because the title company acts as an agent of the underwriter.
The first thing to ask your title company about is a “reissue rate” discount. This discount is dependent upon the title insurance underwriter as well as the property’s location, but it can lower the cost of your policy premium by up to 40%.
Secondly, when purchasing the lender’s and owner’s title insurance policies together, you should 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 purchasing the owner’s policy.
This is not because the agent or underwriter is trying to push the homebuyer toward buying both policies. It’s because the agent still has to do the same legwork to issue a lender’s title insurance policy.
The No. 1 way to save on closing costs is to shop for title services by comparing title insurance premiums and title service fees. Title insurance and title fees make up on average about 30 percent of closing costs, which represents the single largest pot of closing costs that are variable.
There’s not much wiggle room in the other two pots: Taxes paid at closing are based on the purchase price (read: non-variable) and account for roughly 55% of closing costs. Loan costs make up around 15% of closing costs, and lenders’ costs are required by law to remain constant throughout the entire transaction or else pay hefty fines.
The No. 2 way to save on closing costs is by selecting the Standard title insurance policy over the Enhanced (provided it is the best choice for your unique homebuying situation; consult your closing agent). Many title companies quote the more expensive Enhanced policy right off the bat. By requesting a Standard policy, you could lower your title insurance premium by about 15%.
In the age of high speed Internet, it’s easier than ever to obtain quotes from several local title companies online. These days most title companies offer some kind of Web tool for generating quotes for title insurance and title services.
In fact, a title company that is not technologically advanced or transparent enough to offer online quotes, or one that does not openly publish its title service fees on its website, should raise a big red flag in your mind as a consumer.
The best way to decipher your closing costs quotes is to compare the “costs at closing” listed at the bottom of Page 1 on your preliminary Closing Disclosure like the one you can create here.
Become familiar with some of the tricks title companies play that give the appearance their rate is lower. For example, some title companies will publish a very low settlement fee and then in the fine print tell you it doesn’t include costs for a bevy of title services that are typically involved in a real estate purchase – those fees are extra. Be sure to confirm what all is included in the settlment fee when you receive your quote, or ask if the fee is all-inclusive.
Once you’ve determined the true settlement fee for each title company, you’ll be able to do an apples-to-apples comparison and choose the title company that is right for you.
While getting title company recommendations from a real estate agent or lender can be useful, homebuyers should be aware that these agents may be encouraged by their bosses to refer homebuyers to a “preferred” title company that is affiliated with their company via an Affiliated Business Arrangement (ABA) or Marketing Service Agreement (MSA).
Closing with a title company that participates in ABAs or MSAs will increase your chances of overpaying for closing costs by roughly 100%, so buyer beware if you decide to let your agent or lender take the reins on the selection process.
The federal government has gone to great lengths over the past several years to make sure consumers understand exactly what they’re signing up for when they purchase a home with a bank loan. As an extension of the mortgage industry, title companies are now strongly encouraged to clearly outline their fees.
The good news is it’s getting easier for homebuyers to shop, compare and save on title services.
The Affiliated Business Arrangement (ABA) is a business model in which the title company incentivizes business referral sources by offering a legal “kickback” or share in the profit for each closing they refer. It’s considered legal only if the business relationship is disclosed in the closing documents.
However research shows most homebuyers remain unaware of how these kinds of relationships affect their real estate closings. The same research shows when made fully aware, the vast majority of homebuyers prefer choosing an independent title company that does not benefit financially from their closing.
Recent legislation suggests the government is catching on and cracking down on these legal kickbacks.
On the other side of the coin is the Marketing Service Agreement (MSA), which is a business model where the title company incentivizes business referral sources by paying all or a portion of the referral source’s marketing costs.
An example would be if a real estate agent placed an advertisement in the local newspaper, and their “preferred” title company paid for it. Another example would be if a real estate agent hosted a client cultivation event, and the title company footed the bill.
MSAs have been under intense scrutiny in recent years because they teeter on the edge violating the title industry’s guiding legislation, the Real Estate Settlement Procedure Act. In a nutshell, RESPA says title agents are prohibited from offering referral sources a “thing of value” in exchange for business. (It’s worth noting RESPA applies to lenders, too.)Because these ABA and MSA title companies are sharing a portion of their profit with their referral sources, they tend to have higher fees. In other words, the added cost is passed through to the homebuyer resulting in higher closing costs.
During the course of a refinance, your lender will pay off the original home loan and grant a new one that will require its own title search and title insurance policy. The good news is you won’t have to buy a new owner’s title insurance policy.
When it’s time to order title services, you or your real estate agent can visit federaltitle.com/order to place a request for title services. The process takes all of five minutes, and no monies are exchanged until the day of closing.
|A third party claims interest in title||X||X|
|Improperly executed document||X||X|
|Pre-policy forgery, fraud or duress||X||X|
|Defective recording of documents||X||X|
|Undisclosed restrictive covenants||X||X|
Lien placed your title because:
Forced removal of structure because:
|Land cannot be used for a Single Family Dwelling (SFD) because use violates a restriction in Schedule B or a zoning ordinance.||X|
|Pays rent for substitute land or facilities||X|
|Rights under unrecorded leases||X|
|Building permit violations*||X|
|Compliance with Subdivision Map Act, if any*||X|
|Restrictive covenant violations||X|
|Covenant violation resulting in reversion||X|
|Violations of building setbacks||X|
|Access – Enhanced vehicular and pedestrian access||X|
|Map, if any, not consistent with legal description||X|
|Post-policy damage from minerals or water extraction||X|
|Post-policy living Trust Coverage for Trustee||X|
|Post-policy living Trust Coverage for Beneficiary||X|
|Post-policy automatic increase in value up to 150%||X|
|Post-policy adverse possession||X|
|Post-policy cloud on title||X|
|Post-policy prescriptive easement||X|
|Boundary walls and fence encroachment*||X|
|Insurance coverage forever||X|
Title insurance is a billion-dollar industry, but unlike property and casualty insurance, the bulk of premiums written go toward paid losses (claims) and operating expenses.
Most types of insurance (i.e., health, life or auto insurance) cover future incidents, and the bulk of those premiums go toward claims. Title insurance is about loss prevention, which requires a lot of up-front leg work: searching, identifying and eliminating risks that could lead to a title claim.
THE STACKED BAR CHART offers a snapshot of the title industry nationwide between 2004 and 2014. The dark blue bar shows how title premiums-written dropped as the Great Recession set in and have slowly rebounded since. The orange bar shows that claims-paid have stayed fairly constant (just below $1 billion on average), and there was a slight uptick in claims paid during the Great Recession when many foreclosures were on the market.The fuchsia bar shows the title industry’s operating expenses, which were quite a bit higher prior to the Great Recession. Many title agents downsized or closed their doors all together during the worst of it, which lowered industry operating expenses. At the same time new government regulation and advancements in technology have led to much streamlining of the industry.
Finally, the bright green bar represents adjusted net income for the title industry. In 2008 and 2010, the industry operated at a loss while the other nine years the industry profited.
As a rule of thumb, tack on 3% to 6% of the purchase price to account for closing costs. In our scenario, we used a purchase price of $500,000 and a conventional loan of 20% to illustrate how closing costs are broken down.
As you can see from the donut charts below, taxes make up the bulk of closing costs for purchases in Maryland, Virginia and the District of Columbia followed by title fees. That’s why it’s so important for homebuyers to shop for title services. If math is not your forte, try our free iOS and Web app to calculate your total cash to close.
Title agents discover an issue with title in roughly 1 in 3 closings. Most title issues are resolved pre-closing, but about 5% result in a title claim.
Oftentimes, buyers and sellers never have to hear about the behind-the-scenes curative work that goes on pre-closing. This is because most consumers choose to purchase an owner’s title insurance policy..
Everyone told me that buying and renovating a house would be more work than I anticipated, and I believed them. But I never expected it to take triple the most amount of time I could conceive.
None could have anticipated that in fewer than two years, I would spend my life savings remodeling it and end up suing a Texas LLC for $2.7 million and title…
After six months of shopping, I found a three-story rowhouse with a basement in a neighborhood developing so fast, The New York Times published an article about it.
The house had not been meaningfully renovated since 1895. I plotted and planned for 18 months, installed new windows and completed other maintenance so I could live there.
After the architect drafted plans and I obtained permits, we gutted the house to remove all of the plaster, plumbing, wiring, and wooden framing. Of course, there, in the deepest depths of the remodeling is where my nightmare begins.
My contractor didn’t just call me during the middle of an important work meeting. He called, he left emails, and he texted; my phone was exploding.
I learned from my contractor that, while I was at work, the Maryland agent of a company I’ll refer to as the “Texas LLC” padlocked my brand new, steel front door to the upstairs, broke into my basement, pounded signs in my yard selling my house, and hung more signs on a nearby light post.
He jammed a business card between the padlock and my door that read, “Call Me ASAP! You Should Not Be in This House!”
In the cab ride home, I felt like I was going to crawl out of my own skin trying to figure out what happened.
My fingers could barely dial the number on the card from my apoplexy, but I reached one of the Texas LLC’s agents. She knew my house. It must have been notorious around the office because she knew enough to tell me that the Texas LLC had bought my house at a tax sale in 2006, that their tax deed was superior to my mortgage deed, and that they owned my house.
She referred me to the lawyer who was handling the tax deed, but only the paralegal was available to take my call. He emailed me the District of Columbia Superior Court default judgment and order directing the mayor to issue a deed for my house to the Texas LLC.
Seeing the court orders crushed me. By invading my house, I believed the Texas LLC had taken from me every material good for which I had worked and suffered my entire life.
By asserting that now it owned all of my property and all of my money and all of my toil, the Texas LLC forced me to confront, over the days ahead, the reality that ownership is an ephemeral security; I believed a fiction that no one can take from me my control over material objects.
I was wrong.
I called my title company who referred me to my title insurance underwriter (who knew that these were different companies?).
The underwriter immediately hired council. After two months without response to our attempts to contact the Texas LLC and resolve our dispute amicably, my title insurance underwriter’s council and I sued for $2.7 million.
IN ENGLAND AND AMERICA, we have been litigating title for a thousand years, so I expected that a formula would determine title to the house.
Indeed, D.C. Code § 42-1207, passed only six years before my situation arose, plainly resolved the case in my favor.
Generally, if a buyer has no notice that someone else owns the house, by recording or otherwise, that buyer is a bona fide purchaser whose title is superior even if the prior owner had sold the title to or lost the title to someone else. In my case, my house’s prior owner had failed to pay his property taxes.
The District just wants its taxes, so it allows other people to pay outstanding property taxes, and if the property owner does not repay the new taxpayer, that other person can obtain title by filing a lawsuit.
In almost all circumstances, the property owner redeems the property by paying the new taxpayer, and, in D.C., with 18 percent accrued interest. But in my situation, while the Texas LLC paid the previous owner’s property taxes, the previous owner had not redeemed. So the Texas LLC had filed a lawsuit to obtain title to my house.
Under the common law, that lawsuit would have given me notice of the outstanding claim on title, but D.C. Code § 42-1207 required the Texas LLC also to record a piece of paper, a notice of lis pendens, with the clerk and recorder, so title companies could easily uncover other claims to title.
The Texas LLC’s lawyers had not completed this step, which is why no flags were raised during the initial title search when I bought the house. Just the same, I was a bona fide purchaser, and my title was superior to the Texas LLC’s title.
When all parties appropriately assess litigation risks of a case, parties usually settle to avoid the attorney and expert fees from litigation. This case was no different.
Once the Texas LLC understood the case, it agreed to settle. It sought its property taxes from the District, and my title insurance paid me about $7,000 in my hard losses for a ruined front door and lost income from an inability to rent my rooms as I had planned.
About 18 months after the Texas LLC’s agents broke into my house, the judge signed the order quieting title in my name.
My nightmare was over.
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