Title Insurance 101

In an increasingly digital real estate environment, information is power. You use sites like Zillow to pinpoint your perfect home, neighborhood, and even school district. 20 years ago this information was only readily available to real estate agents, but now it’s just a few clicks away. This transparency is slowly creeping into other avenues of the home buying process, but not quite fast enough. Case in point: title insurance.

Title insurance has been around for nearly 150 years in the United States. For most of its existence, premiums have been just another line item in the mounds of paperwork associated with buying your dream home. Here at Spruce, we think that’s a problem, because title insurance is often the most expensive cost to close on your home. We believe if you’re paying for something, you have the right to know (at minimum) a few things about it:

  • What it is?
  • Why do you need it?
  • Who gets to choose the title company?

What is Title Insurance?

When you decide to buy a home, the deed, between you and the seller is recorded at the county courthouse. Although a deed is a contract between two privates parties, the U.S. has a public recording system so that all third parties are on notice of the transaction as well. Meaning, anyone can technically walk into the county courthouse and pull what’s recorded on your property—since it’s public record.

But, before this seemingly simple process can happen, a lot of background information needs to be collected a.k.a the title search.

  • A title search is essentially a background check on your new home. A title company, like Spruce, will cull through the county’s public records to make sure there aren’t any surprise encumbrances on the property.
  • Encumbrances can be anything from: an unpaid mortgage from a previous owner, a tax lien, or an easement providing the County with a right to use a part of the property.

Process

The title company then works with you and the seller to clear any “clouds on the title” and issues a title insurance policy. This policy insures that you own the property and “title” free and clear, subject to any item that you agree to take with the property—such as a right-of-way easement.

Why do I Need It?

Lender’s Policy
First and foremost, title insurance is required by most lenders when you apply for a loan, and for good reason. Some defects may not be discoverable from a review of the public records, like capacity issues—such as an elderly property owner being taken advantage of and granting rights to their caretaker—or even a forged deed. But, a lender’s policy only protects the lender’s interests, meaning your home loan. If you want to protect your own interest in the property (your equity), it’s a good idea to purchase an owner’s policy as well.

Owner’s Policy
Owner’s title insurance is technically optional, but most people choose to buy it for added protection and peace of mind. This policy protects you if someone sues and says they have a claim against your home from the time before you purchased it. The owner’s and lender’s policies are generally purchased together, and bundling the two often results in a discounted rate.

Record & Index Systems
Even the most skilled title researchers can miss items connected to your property. Much of this has to do with how records are stored. Each county has their own record system—ranging from fully digital to film based technology from the 60’s known as microfiche, as well as paper records.

Not only does each county get to choose their storage method, but it dictates how records are indexed. One county may sort documents by name, while the next one over will decide to index by legal description.

US-Counties

Errors & Omissions
With around 3,000 (yes, that’s how many US Counties exist) different directories and index systems, there’s room for the occasional mistake or omission.

For example, a document may not show up in a search because a name is misspelled, or the legal description is not fully referenced. However, under state law, that missing document can still be tied to your property—meaning you could purchase your home with the previous owner’s tax lien or open mortgage and be legally obligated to pay for it.

Title insurance protects you from this margin of error. Your policy states that you own the property free and clear—other than items you agree to take the property subject to (utility easements and any future encumbrances, like your own mortgages and judgments)—at the date of policy. Title insurance is unique in that it is a one time payment, and it insures against problems that were created in the past, which might manifest in the future.

So to recap, your title policy has two functions:

  1. To protect you from title risks (i.e. a title search misses a mortgage or the taxes weren’t properly paid at closing, etc.)
  2. Defense for challenges to matters insured by the policy. Meaning, even if you’re sued for something frivolous, like a boundary line dispute with a neighbor that isn’t based in fact, but you have survey coverage, the title insurance company has to defend you against the challenge.

You Choose the Title Company

Many homebuyers just go with whatever title company is suggested by their lender. This is completely understandable. The homebuying process can be extremely stressful and title insurance is usually not properly explained.

However, choosing the title company is not only your right, but shopping around can save you a significant amount of cash. At Spruce, we save our borrowers $360 per loan, on average.

The devil is in the details. Even if two companies appear to have the same title insurance premium costs, it’s important to look at all the “add on” charges, like additional costs for title searches and services performed at closing. At Spruce, we offer borrowers a free, no obligation quote that lists out all of our fees, and are also happy to do a line by line comparison of any competitor’s quote.

Bottom Line
Buying a home will likely be the largest purchase in your life, and according to a recent study, "about one in every three homebuyers admitted to shedding tears at some point in the home-buying process." Creating more transparency about the overall process, including title insurance, not only empowers you to make the best financial decision, but can go a long way in minimizing unwanted stress and tears.