What is Title Insurance and Who Pays for It?

Buying or selling a home means anticipating costs, some of which are closing costs. In Oregon, most of the amount needed at closing is for title insurance. This type of insurance isn’t required by law in Oregon, however, lenders require it to ensure a smooth transition from seller to buyer and to protect their own financial interests. But the need for title insurance doesn’t end there.

So, what is title insurance, and why is it important?

What is Title Insurance, and Why do You Need It?

Holding “title” on a home is different from having a deed to a home. The deed is the tangible piece of paper that names the owner, whereas “title” refers to the legal right to ownership, which is more abstract than the deed and far more complicated.

This is why title insurance exists—to take the risk out of title complications. It’s an insurance policy that comes with the purchase of a home to ensure the prevention loss of equity or interest should title disputes arise. Unlike most insurance policies that protect from future incidents, title insurance protects home buyers against the past.

These days, you can find almost anything you want to know about a given property, thanks to digital record keeping. According to The Mortgage Reports, only 3-4% of the premiums collected by title insurance companies are paid out on completed claims. That’s not much compared to home and car insurance companies, which typically pay out on 80% or more. This brings up questions about the necessity of title insurance.

For the lender, their interests are their primary concern. They don’t want to risk financial loss should someone dispute the title of a home they’re funding. For this reason, they require title insurance.

For the buyer, purchasing a home is often the biggest investment they’ll make in their lifetime. Most don’t have an extra few thousand dollars laying around to pay off a third party. For this reason, title insurance is worth the money. And because most lenders require it, anyway, the question of necessity becomes a moot point. 

What Can Cause a Title Dispute?

A title dispute can come about during any phase of a real estate deal. Issues might arise during the survey before a sale, which is done to benefit the buyer. It looks for outstanding liens on the property not disclosed by the owner, hidden or unpaid back taxes, covenants that prohibit certain uses of the property, and much more.

Disputes can also arise after the sale of a home when an unhappy heir of the previous owner, including past spouses, attempts to lay claim to the property.

Other situations that can cause title disputes are as follows.

• Errors in public records
• Illegal deeds
• Forgeries
• Unknown easements
• Undiscovered wills
• False impersonations
• Property line disputes

With so many potential reasons for title disputes, you can see why making sure you have it in place can save you headaches both during the purchase and after the closing of your new home.

Who Pays Title Insurance?

Lenders in all 50 states require title insurance to cover a loan for the duration of the mortgage. This is a one-time fee, typically paid for by the buyer. It’s listed as a “title service fee” on the loan documentation and covers both the policy and the title search.

The seller then typically pays for a second title insurance policy to protect the buyer. This is also a one-time fee, and the cost varies depending on the price and location of the home.

The cost of title insurance depends on the price of the home. To get a rough idea of how this breaks down, take a look at the numbers below, based on the typical .5% – 1% of the selling price.

Why Have Two Title Insurance Policies on One Mortgage?

Let’s look at a real-world application to see how this works. Homeowner Johnson is selling her craftsman-style home to Wilson. Portland City Bank is financing the deal. 

Portland City Bank and buyer Wilson are working together to buy the craftsman. Each will need their own title insurance policy to protect their investment from potential losses due to title disputes. Portland City Bank’s title insurance policy, purchased by the Wilsons, is going to cover the entire amount of the mortgage loan for the bank. It protects PCB’s interest in the property and guarantees that this interest has priority over all other claims to the property. This Lenders’ title insurance policy only lasts as long as the mortgage. 

The Wilson’s title insurance, purchased by Johnson, exists to protect the Wilson’s equity in the home, and it lasts as long as the Wilsons own the home. When the Wilsons are ready to sell, they will purchase a new title insurance policy for the new buyers, which will cover the entire previous title history, as well as any activity that the Wilsons may have added.

What is a Title Search?

Before a real estate sale can be finalized, a title search on the property must be completed. This is a thorough check of records related to the property’s title. The search looks for known defects or other previously unknown “encumbrances” associated with the property. Title companies look through old tax records, wills and trusts, marriage certificates and divorce decrees, maps, court judgements, and any other documents related to the property. 

Can You Afford Closing Costs on the Home You Want to Buy?

Typically, title insurance costs anywhere from .5% – 1% of the total sales price of a home. In Oregon and Washington the charge is typically under 1%.

Don’t forget, though, that this is only part of what you’ll pay at closing.

Fidelity National Title has a helpful closing costs estimator calculator that includes escrow and title insurance costs for the seller. Check it out here. Enter your city and state to get local estimates on total seller’s closing costs.

At the pre-approval process, the buyer should also ask for a breakdown of all their potential closing costs from the lender, which will include their smaller part of the title insurance cost. Buyers closing cost totals are way higher than the total closing costs for a seller in Oregon or Washington.

What if a Title Dispute Arises After Closing?

Most title defects come out in the title search. Liens are a common form of title defect. In this case, a lien holder will be paid off when the property changes hands. Read our blog post on Titles and Deeds to learn more about different types of title defects.

The title search doesn’t always catch everything, however, which is why title insurance is needed.

A good title insurance company will assist in communication with the lender, or whoever is claiming interest in the home, pay them off, if necessary, and obtain a release so they can never claim interest again. It’s crucial that homeowners take action right away when title disputes arise to give their title insurance company ample time to respond.

Where Can I Get Good Title Insurance?

Contact our top 1% sellers or buyers agents today. We work with title experts across Oregon and Washington and can help you find the title company that best meets your needs.

AUTHOR

Stephen FitzMaurice

Stephen FitzMaurice, Realtor is a top 5% real estate agent in the U.S. A Principal Broker in Oregon, Managing Broker in Washington, he has been licensed since 2003 for residential real estate sales. Call his team in Oregon at 503-714-1111 or in Washington at 360-345-3833.

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