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, most 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 a “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 purchasing a home to prevent loss of equity or interest should title disputes arise. Unlike most insurance policies that protect from future incidents, title insurance protects homebuyers 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 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 lying 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 prohibiting certain property uses, 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
- 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 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, look at the numbers below, based on the typical .5% – 1% of the selling price.
We have an up-to-date article on this title insurance cost breakdown including other home buyer and home seller costs here.
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, will cover the entire mortgage loan amount 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 lender’s title insurance policy only lasts as long as the mortgage.
The Wilsons’ title insurance, purchased by Johnson, protects the Wilsons’ equity in the home and 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 Are Liens?
We’ve mentioned that title insurance helps protect against liens, but we haven’t talked about liens in detail yet. A lien, by definition, is a legal claim that acts as collateral. This lien can be used as incentive for a person to repay a debt. For example, say you never paid your mortgage insurance. In that case, it’s likely a mortgage company (or the bank) would put a lien on your property.
Liens incentivize people to pay back their debts, as the person who puts the lien on your property has the ability to foreclose your property. Plus, it becomes incredibly difficult to sell a property with a lien on it without paying off the lien, meaning you’ll likely need to deal with the debt before you can actually sell the property.
Now, granted someone who placed a lien on your home doesn’t want it to be difficult for you to sell the property, because in most cases they want you to pay back your loan using proceeds from selling said home. Say you owed $2,000 in mortgage insurance fees, and a lien was placed on your home. You could either pay that lien off directly with $2,000, or risk the lien holder forcing you to sell your home and getting $2,000 from the sale. Either way, the lien holder gets paid, and the debt is settled. However, say you were able to sell your home with the lien still in place. That’s where things get messy, and where title searches become crucial.
Title searches check to ensure your property doesn’t have any liens on it, because mortgage companies won’t approve a loan on properties with a lien as it can cause legal complications. Title insurance protects you in case a hidden lien does show up during your ownership. When this happens, usually when something was missed in a title search, your title insurance will take care of the lien, removing it from the property. Keep in mind it is incredibly rare for liens to show up outside of the title search, so getting a title search is in it of itself a form of “insurance” against unexpected liens popping up over the course of your homeownership.
Now that you have a better idea about liens and how they work, let’s talk more about title searches and what they do for you as a homeowner.
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 judgments, 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 the total seller’s closing costs.
We’ve also written a more comprehensive article on home seller and buyer closing costs with a full breakdown here.
During the pre-approval process, the buyer should also ask for a breakdown of all their potential closing costs from the lender, including 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.
However, the title search doesn’t always catch everything, which is why title insurance is needed.
A good title insurance company will assist in communication with the lender or whoever is claiming an 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. With over 20 years of experience, we work with title experts across Oregon and Washington and can help you find the title company that best meets your needs. Give us a call at 503-714-1111 or chat with the bot on this site. We’d love to connect with you today!January 15, 2024