As we approach the beginning of home-buying season, with many buyers deciding on the purchase of their largest investment yet, title insurance is essential, giving homebuyers peace of mind and confidence that their property rights are protected.
The COVID-19 pandemic fundamentally changed the way we view our homes. Practically overnight, our homes became our workplaces, schools and gyms. But as our homes increase in value—to the market and, more importantly, to ourselves – it has never been more critical to ensure that our homes are protected.
While title insurance may be less understood by homebuyers, who may see it as just another fee involved in the closing process, it’s important for them to understand the many benefits title insurance provides and the dangers that can be incurred without it.
As an agent, it’s important you know the benefits of title insurance so you can educate buyers.
Why title insurance?
First-time homebuyers may be surprised to learn that there are several costly legal problems that could be attached to a property when a home is purchased. When property is transferred from one owner to another, there may be undiscovered tax liens, forged signatures, recording errors, undisclosed easements, title claims or other defects.
Despite strides made by technology to streamline the process of title searches, the title industry remains a people-centered industry. Skilled professionals remain essential, conducting detailed searches to ensure that a homeowner’s property is protected and carry out involved processes to update and maintain sophisticated databases.
This insurance is a one-time fee paid upfront during the closing process. The fee is typically about 0.5% of a home’s purchase price. The insurance protects an owner’s property rights for as long as they own the property. The longer a homebuyer owns a home, the more cost-effective title insurance becomes.
The majority of the fee paid covers the cost for professionals with local expertise to discover, identify and repair issues caused by title defects that occurred in the past. Because of these preventive measures, title insurance is fundamentally different from other forms of insurance, which charge annual or monthly premiums to provide protection for future events.
Lower loss rates than other insurance
This also means that title insurance has lower loss rates than other forms of insurance. When it come to a home’s title, a claim is serious, and a loss means homeownership is threatened. Low loss rates are good for consumers. The curative work performed by title agents minimizes the fear, disruption and distress that title claims have on homeowners.
Some homeowners may be surprised to learn that they need a new policy when refinancing. When a homebuyer refinances a mortgage, they are paying off the old loan and getting a new one. This requires the homeowner to purchase a new title policy to protect the lender. The policy protecting the homeowner’s property rights remains in effect. The lender wants to know the homebuyer, for instance, didn’t take on a second loan or home equity line of credit between when the home was purchased and later refinanced. Likewise, the lender wants to ensure that if a homebuyer did any remodeling, the contractors were paid and there are no tax liens held against the property.
While other forms of insurance have seen rate increases in recent years, the cost of title insurance coverage has actually decreased 6% nationally since 2004 and almost 2% the past two years, according to industry financial statements. These rate decreases have occurred even as home values continue to appreciate. Additionally, nearly 75 cents of every dollar a title company earns goes directly toward staffing costs and access to databases.
Just like any other significant purchase, we encourage homebuyers to shop around to understand their options and make an informed decision when selecting a company to work with.
In many regions of the country, the seller pays for the title policy. Above all else, it’s important for consumers to ask questions about price, what’s included in their coverage and any discounts available, including during refinancing. The American Land Title Association has several resources on its consumer education website, www.homeclosing101.org, to help homebuyers better understand title insurance and the closing process.
While some states, including Florida, New Mexico and Texas, require all companies to charge the same rate, title insurance rates in other states can vary. Some title companies may include other services in the cost of their title insurance, such as conducting the title search or the closing.
In Iowa, there is a government-run system with rates that may appear lower to other states. However, in Iowa, title insurance costs don’t reflect all of the necessary costs to consumers. When comparing all fees, closing costs in Iowa are higher than those in Nebraska, Arkansas, Wyoming, Kentucky, North Dakota, Indiana and Missouri, according to ClosingCorp.
Let’s say a homeowner purchases their home from a builder who did not pay his roofer. Without title insurance, the new homeowner would be responsible for paying the roofer—even though the legal dispute occurred before he or she purchased the property.
In another scenario, a man sells his property to his girlfriend, who is pretending to be his wife. The quitclaim deed is duly signed and notarized, but a few years later, during divorce proceedings, the real wife learns about the transaction and the quitclaim deed, which she never signed.
While most homeowners will fortunately never experience these sorts of legal problems, title insurance provides an important safety net and peace of mind. Without title insurance, homeowners are not protected from a devastating financial loss that may result from a title defect, tax lien, undisclosed easement, or fraud or forgery. When there is a loss, it is usually significant—sometimes in the hundreds of thousands of dollars.
When purchasing a home, homebuyers have enough on their plate. Title insurance provides one less thing to worry about for as long as you own your home. Together, real estate agents, title insurance professionals and other stakeholders involved in the real estate transaction can protect consumers and provide them with a better experience during the real estate closing process.
Diane Tomb is the CEO of the American Land Title Association.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
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