One of the most expensive line items on the buyer side of the settlement sheet is title insurance. Most folks don’t understand what it is and whether or not they should get it. If you are getting a mortgage on the property, the lender will require lenders coverage but buyer coverage is optional. Before deciding whether to take the buyers coverage or not, let’s discuss what title insurance is, how the premium is determined and cover real life examples of where title insurance came into play.
WHAT DOES TITLE INSURANCE COVER
When you purchase a home, the main job of the settlement company is to make sure you have clear title. That means they will go to the courthouse and review the transfer of the home and the land beneath the home going back several decades. They will also ensure there are no liens or judgements against the property (unpaid taxes, unpaid HOA dues, mechanics liens etc) and that there are no judgments or collections against the the owners that could attach to the home. (IRS liens, lawsuit judgments, etc)
If there are any issues with the title and you are applying for a loan, the lender will not release the funds until the title issues are cleared. If you are paying cash, the attorney will make you aware of the issues. In either scenario, cash or loan, if you are using the standard Northern Virginia Association of Realtor contract and the title issues are minor and able to be corrected by the seller within 30 days, settlement is extended to allow the seller time to clear the title. If the issues can not be corrected, the purchaser can void the contract. Again, if you are applying for a mortgage and the issues are such that a title insurance company will not issue a policy, your contract will die as you will not be able to get the loan.
Now, even after all of that checking at the courthouse, things happen. The title examiner at the courthouse could have had a bad day and missed something. If a document is not pulled for review, the attorney has no way of knowing it exists. Plus the review of documents only covers what is recorded. Those documents could involve forgeries or maybe not all parties signed the deed.
If a wife shows up with a death certificate for her husband stating she is the only owner, yet he turns up months later to find his house has been sold, well, that is a bit of a problem and one the attorney would have had no way of detecting.
Or if the heirs state there were just 3 siblings and all 3 sign the deed but a year later the child from the first wife no one knew about surfaces, there could be a problem.
Title insurance covers any issues regarding the legal transfer of the property and the land beneath the property from the beginning of time up to the day of settlement. Should something happen that threatens your property rights, the title insurance company will pay for the attorneys to defend your interests and cover any awards won by the other side up to the purchase price and with some policies up to current market value.
(There are some enhanced policies that cover future events such as mechanics leins placed on the home after settlement or the discovery of work that was done without a permit. Talk to your settlement attorney for more detailed coverage issues. This is meant as a general overview.)
Note, the owners coverage lasts the rest of your life even after you sell the home. The reason? Let’s say you bought a home in 2000 and sold it in 2014. Then in 2025, some future owner discovers a title issue dating back to 1990. Every owner between 1990 and 2025 could be sued because each owner stated they were conveying clear title when they were not.
HOW MUCH DOES IT COST?
The answer varies by state. Some states have the rates set by the insurance commission. In other states the rates are set by the individual settlement companies. In all instances, the price of the policy is based on the purchase price. The are also basic and enhanced policies. Contact your settlement agent for the differences.
In Virginia, I do not believe the rates are not set by the state but in my experience, regardless of settlement company or title insurance company, the cost appears to be the same. I can accurately predict the cost of the policy regardless of where my buyers settle. Some companies may add in a small binder fee. But rather than go line by line, it is best to ask the settlement company for the total settlement costs they control. All of the settlement company cost – closing fee, attorney fees, title insurance, etc are contained in the 1100 series of the HUD sheet. If a company adds $50 to the cost of title insurance but their closing fee is $150 less than the competition, you are still better off with the more expensive title insurance. Here are 3 wonderful settlement companies with online calculators that can show you the price of title insurance and settlement costs. (company 1, company 2, company 3.)
There is one potential discount available which is called a reissue rate. This discount can be several hundred dollars. If your seller has purchased the home in the last 10 years and they purchased title insurance, you could get a reissue rate. The actual amount depends how long ago they bought the policy and the purchase price of the home. Some companies have declined to do reissue rates. If your home qualifies and the settlement company will not give you the reissue rate, it is well worth switching companies.
REAL LIFE EXAMPLES
Story 1. Years ago, I represented sellers who had owned the home for 10 years. The sellers they bought from had 2 loans. One was a 1st trust with a national institution. The other was a 2nd trust with a private individual.
When a home sells the settlement attorney sends money to the seller’s lenders to pay off the old loans. I have never seen a case where that did not happen.
Next the lender records a “paid in full” document at the courthouse so everyone can see there is no longer a lien on the property. (Or they send the “paid in full” document to the attorney to record.) This part doesn’t always happen. When is it discovered? When the buyers become sellers and the new settlement company conducts a title search.
If the the loan is with an institutional lender – still in business – this is an easy matter to clear up. In my case the national lender had recorded the paid in full document. The private loan was not recorded and was an “unreleased trust.”
Fortunately, we were able to track down the gentlemen who provided the money and get a statement that he had been paid. The settlement was only delayed a few days. But this man was 90 years old and in failing health. If he had been deceased, this would have been a very hard one to solve and title insurance could have come into play.
Story 2. Recently a colleague of mine did have a situation where the title insurance company actually got involved and was able to resolve the situation with only a week delay in settlement. Here’s the story:
In 1990, the Harper heirs sold to the Zimmerman family. Of course the settlement attorney reviewed the will and ensured all heirs signed or so he thought.
In 2000, the Zimmermans sold to my colleagues clients, the Werths. Title was researched and the attorney thought all was fine.
This year the Werths were under contract to sell to the Gonzalez family. The settlement attorney discovered that there was another Harper heir who should have signed in 1990. This was a big problem. The missing heir had a right to the property. Where was he? Did he get the proceeds due him in 1990? Even if he did would he claim he did not – if he could be found?
Somehow research indicated this guy was probably living in Virginia Beach but he was also rather elderly and no one was sure if he was dead or alive. And no one had an exact address. The title company got involved and tracked him down.
They found him and he signed the necessary document so settlement could proceed. Had they not tracked him down, there could have been a rather large claim they would have needed to pay to clear it all up.
Story 3. Here is a recent Washington Post article on title insurance with another story where title insurance came into play.
BOTTOM LINE
I think you should purchase title insurance. Yes it is expensive. And yes the chance of a claim is very, very slim. But if that claim happens, it will likely not be a fender bender. Your ability to stay in your home could be in jeopardy and/or the cost of defending your right to stay will be too expensive for you to handle. You are purchasing an asset that costs several hundred thousand dollars. I feel it is a relatively small price to pay to protect an asset of that size. I buy it on homes I am purchasing and would recommend you do as well.
