Common Buyer Mistakes: Title Insurance

I often get asked for the most common mistakes buyers make, and there are many. One that is less well known is around Title Insurance. Title insurance is required if you have any mortgage on the property. There are actually 3 types, all of which are paid by the buyer. The lender’s coverage (required), the owner’s coverage (optional) and owner’s “enhanced” coverage (optional.) Title insurance runs into the thousands of dollars and is often the majority of a buyer’s closing costs at settlement. So what is Title Insurance and is there any way to save money on it?

Title Insurance is protection against claims against the property. You pay the premium one time, at settlement only, and it covers you for the length of time you own the property. Title insurance and the title search is coordinated by your settlment company. A title insurer does a title search–a review of Court House records to determine if there are any frauds, forgeries, or errors in the chain of title to the property you are about to purchase. It’s common for documents to be misfiled or have errors, and your lender knows this. Therefore, they require you to purchase a lender’s policy of title insurance to protect their interest in the loan. The lender’s policy does not protect you. As you pay down your loan, there is no longer coverage unless you purchase the optional “owner’s policy.” It covers you in case someoen else turns out to own an interest in your title, there is fraud, forgery or duress, or defects int eh recording. While these events don’t happen often, the cost of the optional owners policy is fairly minimal (about $1 per thousand of loan amount). You can also buy “enhanced” owner’s (about 20% more than the standard policy) coverage that adds in things like being forced to remove a structure that encroaches on a neighbor’s land, building permit violations, post policy forgeries and clouds on the title, violations of building setbacks, and insurance coverage even after the loan is paid off.

Some people argue title insurance is not necessary in most cases, and they’re right. Things like homeowner’s insurance aren’t necessary most of the time, either, but people sure are glad when something goes wrong and they have that policy! Isn’t that what insurance is…protection in csae you ever need it? For me the key is not whether to buy it (besides, the most expensive portion of it–the lender coverage– you have no choice about anyway), the key is how to minimize the cost. And no, the answer isn’t to shop around.

The key way to save money on title insurance is two words most buyers (and many agents!) don’t know: Reissue Rate. A reissue rate–which you have to request–is a discount on the policy premium that is offered when a property has had another full title search in the last ten years. In this area, that’s almost always the case. So say you’re buying a condo from someone that has lived there 3 years. If you can get their title insurance policy number, then your title insurance company can partially rely on that search, and they only have to search the last 3 years, saving them time, and saving you money. How much money? Into the thousands of dollars depending on how much the property is worth (fees are charged as a percentage of the property value.) For most first-time buyers in this area, you can save about $500-800 dollars.

Make sure to ask your agent if they know what a reissue rate is and how to get one.