The cost to buy a home includes much more than the home itself. By the end of the home buying process, the total purchase price swells to include an array of closing costs, among them title insurance. While you probably cannot eliminate the expense entirely, you might be able to lower your title insurance cost. First, though, you need to better understand what title insurance is and what factors affect your title insurance cost.
First of all, you must know what “title” is. Title is the legal right of ownership. In real estate, the titleholder has property rights, which means the titleholder can access, occupy, lease, develop, sell, transfer, or will the property. In order for a purchase to complete, ownership of the title must transfer.
Defects in a title can result in future costs, limit use of the property, jeopardize the home buyer’s right of ownership, or invalidate the lender’s security interest in the policy. Defects could include outstanding liens on the property, easements, clerical errors on filed records, and more.
Title insurance is an indemnity insurance policy intended to provide the policyholder with protection against losses that result from unknown defects in your property’s title. Unlike most insurance policies, which insure for losses from future events, title insurance only covers for future losses from events that happened prior to the closing of the real estate purchase.
Most lenders require a lender’s title insurance policy, which will remain in effect for the duration of the mortgage but decreases over time as the lender’s interest dwindles. Some home buyers choose to purchase optional owner’s title insurance to cover their own potential losses and protect their financial stake in the property. A lender’s title insurance premium costs significantly less than an owner’s title policy because the covered amount for lenders declines over time as the mortgage is paid off.
Title insurance cost is the combined fees of a few title-related items:
- Title Search: After the seller accepts the purchase offer and the earnest money deposit enters escrow, the mortgage company usually orders a title search. The title insurance agent or company searches public records, such as property assessment records, deeds, wills, court records, and tax liens, to document the property’s chain of ownership.
- Title Report: The results of the title search are documented in a title report, which identifies the current owner, property description, and encumbrances discovered, such as unpaid property taxes, outstanding mechanic lien, mineral rights, recording discrepancies, and other title defects. The title report also presents the proposed policy, restrictions, and coverage.
- Attorney’s Fees: If the title report is problematic or otherwise requires legal review, an attorney might be retained to perform a title examination. If so, then expect to see additional attorney’s fees.
- Insurance Premium: A one-time fee paid at closing, the title insurance premium provides coverage for the duration of the policyholder’s financial interest in the property. Lender’s title insurance averages 0.50 percent to 1 percent of the loan amount.
- Miscellaneous Related Fees: Other title-related costs could include recording fees, deed preparation, settlement fees, and other costs associated with the title search and clearing possible problems with the title.
Title insurance costs can be paid by either seller or buyer. The responsible party varies by region and local real estate practices.
You generally have little control over most of the factors that affect the title insurance cost, but you can control a couple factors to some degree.
Because title insurance premiums are calculated in large part as a percentage of the sale price, the home’s purchase value becomes the most significant factor in title insurance cost.
The amount of the mortgage affects the title insurance premium since the premium usually is based on calculating a certain percentage of the loan.
More than 40 states regulate title insurance costs under state law. So where the house is located affects the amount legally permitted for title insurance premiums. The geographic region also influences the price of the house, which in turn directly impacts the price of a title insurance premium. In hot housing markets, such as the San Francisco Bay Area or Denver metro area, housing prices soar above the national averages. Buying a house in a booming real estate market automatically increases all closing costs, including title insurance.
The older a house is, the more likely the property has had multiple owners. For older properties, the title search might require more time and effort, as additional records must be reviewed across a longer time span. This can increase the expenses for the title search and title report.
Some costs are based on the amount of work necessary to obtain accurate information on both the covered property and adjacent properties, to conduct a thorough title search, and to cure any defects. A property with one owner across its life span should be much less involved than a property currently in foreclosure that has changed ownership many times.
In states where the premium is not regulated, like California and New Mexico, the title insurance cost can vary by company. In unregulated states, shopping around and comparing title agents can result in different costs.
Title insurance policies typically have standard exclusions that are not covered. Home buyers can choose to obtain extended coverage to protect their investment against additional defects or other threats to the title. A common endorsement added by homeowners covers the property’s increased value in the future. Standard policies limit protection to the policy’s face amount, usually the market value at the time of the purchase. To cover increases in the value of the property, you would need to buy additional coverage. Depending on the specific endorsements added to the policy, obtaining extended owner’s coverage can cost an additional 15 to 50 percent above the standard policy.
The journey from home buyer to homeowner can be tedious and, at times, overwhelming, with the path to homeownership complicated by various roadblocks and hazards. LemonBrew exists to serve as your guide along the way. LemonBrew works to improve your entire home buying experience, from matching you with an expert local real estate agent to navigating the title search and review and even helping you find the best mortgage options available to you. Partnering with LemonBrew brings you access to a host of experts who can make your road to owning real estate a smoother one.