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Title InsuranceMy aunt tells the story of a close friend of hers who purchased a house through an unscrupulous realtor. The friend was told the Seller would carry the loan and he did not need to buy title insurance because the owner had owned it for a very long time. It turned out the person who signed the deed was not the real owner of the property and the friend lost a lot of money and did not receive title to the house. Buying title insurance would have been a very wise and prudent thing to do.
Most real estate transactions involve a loan, and lenders require that title insurance be purchased for the amount of the loan. Lenders would be out of business very quickly if they were not assured of the priority of the lender's security interest over the other liens, claims or encumbrances on the property and that the property belonged to the person selling it. Title companies sell the lender's policy covering the amount of the loan and the owner's policy covering the amount of the sales price. When these policies are purchased concurrently during a sale they also sell "enhanced" policies covering items just as unrecorded easements, building permit violations, post policy forgery, map not consistent with legal description, or discriminatory covenants. These policies cost approximately 10% more than the standard owner's policies.
Title insurance is unlike regular insurance in that the Title Company does not require on-going payments for reserves to cover an expected number of losses. Title companies investigate the title at the time of sale or refinance. The intent is to identify and eliminate risk, not to assume risk. Most of the money spent for title insurance goes toward the title search, which researches many years of property transfers and liens for the specific property. At the close of escrow, the Buyer is issued a title insurance policy, which would defend against losses resulting from a covered claim. One escrow officer told me that an example of this would be a divorced spouse who has moved away and returns to find the other party forging their signature sold their house. The title insurance would cover this claim.
In my area where home prices are very high and closing costs are a significant amount, title insurance can seem a daunting amount to many. On a $400,000 house, title insurance at First California Title costs $1445 for the basic owner policy and $534 for the lender's policy. At First American Title, the cost is $1373 and $537 respectively for the basic policy and $1511 and $591 for the enhanced "eagle" policy. The escrow fee would be $725 at First California and $815 at First American. Both have an added $100 "document preparation" charge that neither escrow officer could explain because they both described the escrow fee as a charge that covers the handling of the monies in a transaction and the drawing of documents.
I have read about a new move afoot by consumer advocates which would make title insurance more affordable for Buyers. It is thought that title companies charge exorbitant fees, both during sales and refinances, and that title searches on properties which have sold several times cost the companies very little and have little risk involved. In light of the many scandals currently involving title companies paying kickbacks to realtors and loan agents and charging fees for activities the company does not perform, it will be interesting to see what changes are in the making.
In any event, the purchase of title insurance is a necessary part of purchasing a house. With prices escalating, it would be very painful for lenders and Buyers alike to find they are not the rightful owner or lien holder.
Compliments of Juliana Wynberg, Marvin Gardens Real Estate