Who Pays for Title Insurance? Oregon Closing Costs

title insurance closing cost estimates

When’s the last time you heard of someone losing their home because an unsatisfied heir of a previous owner laid claim to it? You probably haven’t because of title insurance, an often-overlooked component of real estate transactions. In Oregon, title insurance represents a lion’s share of the average home seller’s closing costs, but home buyers have to buy a policy, too. But let’s start with the most frequently asked question our real estate agents are asked about title insurance: What exactly is it?

What is Title Insurance? 

A “title” refers to the legal right to ownership; it’s an abstract concept and different from a “deed”. With a deed, you just have a piece of paper stating ownership, which is pretty straightforward. With “title”, things can get much, much more complicated. 

Title insurance exists to take the risk out of those title complications. It’s a policy that comes with the purchase of a home, and it prevents loss of equity or interest in the home because of title disputes.

Is title insurance necessary? 

In the days of digital record-keeping, pretty much anything that can be known about a given property, is on file. That makes title insurance different from most insurance policies, which seek to insure against future, unknowable events. According to curbed.com, only 3-4% of the premiums collected by title insurance companies are paid out on claims. That’s not much compared to home and car insurance companies, which typically spend 80% or more of the premiums they collect on fulfilled claims.  

Honestly 3-4% is higher than I’d even expect as the issue is so rare in the real estate market. But whenever a claim is awarded, one can imagine it is to the tune of hundreds of thousands of dollars.

Title insurance is considered a necessity of home ownership because people can come out of the woodwork with legitimate claims to the title. Because buying a home is the biggest investment most people will make in their lifetime, and most people don’t have an extra few thousand dollars around to pay off a third party, title insurance is well worth the money. And most lenders require it, making the question of necessity a moot point. 

Closing Cost Calculator, Estimator for Sellers and Buyer

Fidelity National Title puts out a handy closing costs estimator calculator that includes title insurance costs for the seller. Check it out here. You have to put in your city and state to get local estimates on seller’s closing costs. A buyer should ask their local mortgage lender to give them a breakdown of all their potential closings costs (the lender will wrap in buyer’s title insurance) when they are getting pre-approved.

Who pays for title insurance in Oregon?

There are two types of title insurance: Lenders’ title insurance, which is paid for by the home buyer, and Owners’ title insurance, which is usually paid for by the seller.

Lenders’ title insurance is required by lenders in all 50 states, and they almost always require home buyers to pay for it. It’s usually listed in the loan documentation as a “title service fee”, and includes the cost of the title search and insurance policy.

In Oregon, sellers are responsible for purchasing an Owners title insurance policy to cover the buyers’ investment. The title insurance policy cost varies according to the price of the home and its location.

Title insurance is paid for up front, not in a yearly premium like other insurance policies. For most home buyers and sellers, it’s a “purchase and move on” situation, and most owners forget that they even have title insurance until the time that they need it.

Isn’t it redundant to have two title insurance policies?

Let’s use an example here — Homeowner Smith wishes to sell a bungalow to Jones, who is financing the purchase through the Bank of Portland. 

So, we have two parties (Bank of Portland and the Jones) working together to buy the bungalow. Each will need their own title insurance policy to protect their investment from potential losses due to title disputes. Bank of Portland’s title insurance policy, purchased by the Jones, is going to cover the entire amount of the home loan for the lender. It protects BoP’s interest in the property and confirms that 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 Jones’ title insurance, purchased by the Smiths, exists to protect the Jones’ equity in the home, and it lasts as long as the Jones own the home. When the Jones are ready to sell, they purchase a new title insurance policy for the new buyers of the home, which covers the entire previous title history, as well as any activity that the Jones may have added.

What exactly is a title search?

Before the home changes hands, sellers must provide a disclosure statement, which reveals any potential problems with the home and title. The next step is ordering the title search. 

The title search is a thorough check of records related to the property’s title, seeking to uncover any problems — known in the industry as defects — or other previously unknown “encumbrances”. Title companies look through old tax records, marriage certificates and divorce decrees, wills and trusts, court judgements, maps and any other documents related to the property. 

If any defects come up, the seller will then have the opportunity to clear them, which may require paying off liens or filing the correct paperwork to establish that they do have the right to sell the home. Some “encumbrances” are considered acceptable, such as easements for utilities. In this case, the buyer will simply need to verify that they agree to the encumbrance. 

Even the most thorough title search can sometimes miss title defects, which is why title insurance exists.

What if there is a claim against the title later on?

Most title defects come out in the title search, whether it’s unpaid back taxes, data entry errors, forged signatures, or property line disputes. Liens are a common form of title defect, and sometimes a lien holder must be paid off when the property changes hands. Read our blog post on Titles and Deeds to learn more about the types of title defects out there.

However, as we’ve already mentioned, the title search doesn’t catch everything, which is why title insurance is needed. It doesn’t happen very often, but someone may come forward with a legitimate interest in the home. It may even be a prior lender, who is now demanding payment or they’ll foreclose on the house.

A good title insurance company will negotiate with the lender, or whoever it is claiming interest in the home, pay them off if necessary, and obtain a release so that they can never claim interest again. However, it’s crucial that homeowners take action right away when title disputes come up, giving their title insurance company as much time to respond as possible.

Can you recommend a good title insurance company?

Yes! We work with title experts across Oregon and Washington, and can help you find the title company that meets your needs best. Contact our top 1% real estate agents today!

September 21, 2020
AUTHOR

Stephen FitzMaurice

Stephen FitzMaurice, Realtor is a top 5% real estate agent in the U.S. and a top 1% agent in the Portland Metro. Principal Broker in Oregon, Managing Broker in Washington he has been licensed since 2003 for residential real estate sales in the Portland Metro area. Call him direct: 503-714-1111.

Pay less (4.5% commission max.) and get more with his top 1% listing team or buy your next home with his excellent top 1% buyer’s team. We work from Salem, Oregon to Vancouver, Washington and beyond. Check out our full services areas on the top menu.