Surely, many a first-time homebuyer who has waded through the closing process has come across the line-item charge for something called "title insurance" and has been simultaneously puzzled at just what it is he’s buying and annoyed by its several-hundred-dollars cost.
Homebuyers tend to be only vaguely familiar with title insurance, agrees Jeremy Yohe, director of communication for the American Land Title Association, a trade group for title companies in Washington, D.C.
"After all, people don’t buy it too often — typically, how many times do you buy a home in your life?" he said.
The product, at its most basic, insures that the person or entity selling a property really owns it and that others don’t have a legal interest in it or that other legal circumstances don’t cloud the seller’s right to convey its ownership.
It’s been in the headlines recently in yet another round of anxiety over the foreclosure mess: Legal observers are concerned that some foreclosing lenders may have skipped some of the legal steps in the paperwork, placing that aforementioned cloud over their legal right to sell the homes — and, in turn, the new owners’ right to possess them.
Five things to know about title insurance:
1. It comes in two basic forms, Yohe said.
"One is called the lender’s policy, which protects the lender’s interest, and its cost is based on the amount of the loan that you take out," he said. "A lender is going to require you to purchase that."
The lender, in other words, wants to make sure that if you’re pledging the home as collateral for the mortgage, its legal ownership is firmly established.
"Then there’s the owner’s policy, which is based on the value of the property when it was purchased," Yohe said. A homeowner’s title policy isn’t mandatory if the buyer is paying cash for the property.
2. In order to issue the policy, the title insurer undertakes a search to discover the identity and "repair," in the jargon of the business, anything in the past that would blemish the title; such repairs would be needed if, say, a contractor had placed a lien on the home that would need to be legally remedied in order for a sale to proceed.
The title agent will examine the history of the property in public records, he said. The depth of the search tends to vary by locality and by company policy, but Yohe said a "good search" to clarify ownership goes back 30 to 40 years.
In addition, a title search may include birth and death records to see if any unknown heirs’ rights to the property must be considered.
3. Yohe said it’s difficult to generalize about title insurance costs around the country.
"The range could be $500 to $1,500," he said. "It’s going to be based on the value of the property. The rate, and what’s included in the policy, varies by state. In some states, the title insurance premium may include the search and examination, but in some states it’s listed separately."
Even the practice of who pays for the title insurance in a transaction varies — in some areas it’s the home seller, in others the buyer.
"It actually can vary from county to county," Yohe said.
A handful of states, including Ohio, New Mexico and Texas, cap the prices that title insurers can charge.
4. Consumers who don’t buy and sell real estate very often may be surprised at how many things, large and small, can turn up to complicate the legal ownership of a property, he said.
Yohe said industry data suggest that 1 in 3 title searches turn up some kind of fly in the property ointment.
"There are issues of taxes not always having been paid, new liens being added," he said. "People take out loans on a house" that can hold up a property transfer if they haven’t been repaid.
Sometimes it’s just sloppy paperwork that creates a title stir, he said.
"Minor things you wouldn’t think about can raise a red flag," he said. "Say a person (on the title) is Smith or maybe it’s really supposed to be Smythe. Or a junior, or the use of a surname — all of that could be an issue," he said.
5. Yohe said it’s important for homebuyers to consider how much coverage they’re getting. In the case of a homeowner’s policy, title insurance covers just the purchase price of the house.
But because foreclosed properties generally are sold in "as is" condition, the buyers of such homes often undertake renovations in the course of making the place livable.
So if — as the lenders’ critics fear — some prior owners of foreclosed homes manage to get their houses back from the new owners because of kinks in the paperwork, those buyers may indeed get financial relief from their title insurer, but only as much as the purchase price — not the renovations.
"There are riders you can purchase to cover the improvements," he said. "You’ll have to inquire with the title company about them."