Yahoo Finance Home buyers can’t avoid title insurance. But there are ways to save.
Most home buyers view title insurance - an important backstop against surprise claims on your property - as just another box to check under closing costs. But as housing affordability remains an acute concern and high interest rates keep the property market out of reach for many would-be home buyers, it’s come under growing scrutiny, from consumer advocate groups to the Biden administration. Critics say these policies - typically running several thousands of dollars - can be overpriced.
For certain homeowners, some limited relief could come soon. But there are still other ways you can save on title insurance right now. Here’s what you need to know.
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What is title insurance?
When you take over the title of a new property, you need to buy an insurance policy to make sure a third party can’t declare a claim to your new home. Title companies run a check before the closing to make sure there are no outstanding unpaid mortgages or liens or inheritance disputes that could complicate ownership.
“Title insurance companies don’t just find issues with the sale of the home; they fix them before settlement,” said Ted Tozer, a nonresident fellow at the Urban Institute’s Housing Finance Policy Center.
A policy protects sellers, too, “because it means they are selling their home with a clear title,” he added.
According to Steve Gottheim, general counsel for the American Land Title Association (ALTA), a trade group, “the risk of fraud, particularly seller impersonation or deed fraud” is especially worrisome. “That type of fraud has increased in recent years,” he said.
Nearly 30 percent of title insurance claim expenses come from title problems, often linked to fraud, that can’t be discovered by a records search - with an average cost of $143,000 per claim, according to ALTA.
“Property owners might not lose their home in this kind of scenario, but without title insurance, they could end up spending tens of thousands of dollars to fix the issue,” Gottheim said.
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How does title insurance work?
Title insurance - which is paid for up front, at closing - covers several important functions.
First, the title company runs the initial title search, which involves hunting down all records related to the property to check for liens such as an unpaid bill from a contractor or back taxes, or ownership claims from a forgotten heir.
The search also reviews boundary lines and easements that might allow other people to use the property for something like driveway access or a path to a common area. And after the title search is completed and all issues are resolved, title insurance provides protection against claims not found during the search, including legal fees.
If a home buyer needs a loan, lenders require a title insurance policy to check against any claims that might not show up on the initial title search. These policies cover the property up to the amount of the loan, which would be paid in full if there’s a claim against the property.
If you own the home, owner’s title insurance is also recommended as a way to protect the investment from future claims. (In roughly half of states, the cost of the owner’s policy is paid by the sellers; in four states, buyers and sellers split the costs; and in the rest, it’s paid for by the buyers.) According to Gottheim, about 75 percent of homeowners purchase owner’s title insurance.
Since the bulk of the expense occurs when the title search is conducted, adding an owner’s title insurance policy is relatively cheap, usually around a few hundred dollars, Tozer notes.
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Why is title insurance in the news?
As housing has become more and more expensive, home buyers are looking for savings across the real estate transaction, including through closing costs and soon real estate commissions. Title insurance is among the add-ons that have come under more scrutiny.
The cost of a title insurance policy is typically pegged either to the rate of the title agency or the rate established by the state government, as a dollar amount per $1,000, and then multiplied by the purchase price. So the more expensive the home, the costlier the policy. According to the Urban Institute, the average premium on a $400,000 property is $2,000.
As one measure to address housing affordability, President Biden announced at his State of the Union address in March that his administration has greenlit a pilot program to eliminate title insurance on certain kinds of refinanced mortgages. Run through the Federal Housing Finance Agency - which oversees Fannie Mae, Freddie Mac and the Federal Home Loan Banks - it aims to save homeowners an average of $750, and up to $1,500, per refinance.
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Is title insurance overpriced?
Citing the Urban Institute analysis, the White House announcement noted that title insurance companies typically pay out only 3 to 5 percent of the premiums they collect for claims, compared with more than 70 percent for other types of insurance.
Housing advocates point to such numbers to argue a shake-up is needed.
“The industry isn’t competitive,” said Birny Birnbaum, executive director of the Center for Economic Justice, an Austin-based nonprofit that advocates for low-income and minority consumers in issues such as insurance and utilities. “[Title] insurance costs the same for a 300-year-old house that could have lots of claim issues [as] a newly built house.”
Birnbaum and other advocates argue that if the cost of the premium reflected the labor and material cost of the actual title search, it would be far cheaper, probably in the hundreds of dollars rather than thousands.
The trade group ALTA counters that the low payout percentage reflects that fact that the title search process proactively finds and resolves potential claims before the closing - which is something other insurance policies, such as homeowners insurance, cannot do.
This upfront work means “title insurance is more like a service with a warranty, because the insurance provides back-end protection after a comprehensive title search is done,” Gottheim said.
Even with the upfront work, significant payouts still occur. In 2023, the title industry paid $638 million in claims, according to ALTA.
Meanwhile, the median cost of title services and insurance has been dropping, according to ALTA. It averaged 0.67 percent of the purchase price in 2023, a drop of 5 percent from 2018.
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How can home buyers save on title insurance?
Birnbaum and other advocates have called on lenders to take on the cost of title insurance policies - and be barred from passing it on to home buyers as a separate charge.
“The lender would have an incentive to look for the lowest prices,” Birnbaum said.
Until that kind of far-reaching change happens, consumers can still take steps to save money.
- Shop for title services. Some states regulate title insurance premiums so the rate for the insurance itself is standardized - but even in those states, home buyers can shop for title services and compare fees. “Don’t just take the recommendation of your agent or your lender,” Tozer said.
- Ask for the reissue rate. If you’re refinancing, you can request a reissue rate from your current title insurance company. How much lower that rate is depends on how long ago the title search was done, according to Gottheim. “You might get a big discount if the last title search was a year ago, but if it was 10 years ago, the discount is likely to be smaller because more records will need to be searched,” he said.
- Request title insurance information from the seller. Gottheim notes that buyers can sometimes get a reissue rate or a discount if they choose the same title insurance company that the seller uses, since it already has a starter file to work with.
- Negotiate a discount. Some title companies will offer a discount if you come into the office instead of sending someone to your home, Tozer notes.
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Michele Lerner, a freelance journalist based in D.C., covers real estate, personal finance and business topics for a variety of publications, including the Wall Street Journal, the New York Times, the Boston Globe, Washingtonian magazine, Green Builder Media and Urban Land magazine.
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