What exactly is title insurance?
When you buy a home, you must obtain the title. This is a legal concept that confirms you’ve received ownership rights for the property — including the rights of possession, control, enjoyment, disposition and exclusion — from the seller.
While a title search during the home sale and mortgage lending processes will typically uncover any title issues, this type of insurance policy can protect you and lenders from potentially serious financial losses if any title defects are missed.
Common title defects that are covered include outstanding liens, back taxes, conflicting wills, zoning non-compliance and fraud or forgery.
Mortgage lenders require homebuyers to purchase a title insurance policy for an amount equal to your mortgage loan, according to the National Association of Insurance Commissioners. Known as lenders’ title insurance, this protects lenders from any losses that arise from previously unknown problems in the title that have only become known after your insured property was financed. The Fannie Mae pilot would have waived this purchase requirement.
Additionally, homebuyers can protect themselves from any such losses by purchasing owners’ title insurance. This is sometimes paid for by the seller as part of their obligation when transferring the title to you. That can be part of the purchase negotiations. The cost of owners’ title insurance can vary.
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Why is title insurance so contentious?
Title insurance is a contentious financial product because it‘s expensive and homeowners rarely have to make claims because many issues are caught up front. A policy can cost thousands of dollars, which adds on to the soaring cost of housing.
American title insurers brought in $3.37 billion and $3.91 billion in title insurance premiums during the first and second quarters of 2023, respectfully, while paying out just $331.8 million in claims during that same time period, according to data from the American Land Title Association (ALTA).
That relatively low payout has left many wondering why this insurance is so expensive.
In 2022, Boston public radio station WBUR published an investigation into the cost of title insurance. One homebuyer claimed to find nearly 80% of the amount paid for insurance — $3,800 of $4,800 — went to the firm of the lawyer hired to help close the deal.
In the report, Bruce Marks, CEO of Neighborhood Assistance Corp. of America, a Boston-based nonprofit that helps people with low and moderate incomes get mortgages, accused lawyers and title agents of driving up costs via a hidden commission arrangement.
“You can call it a fee. But I believe it's a kickback,” he told WBUR. “It’s a scam, not just in Massachusetts. It’s a scam nationwide.”
The ALTA responded to the report, arguing that the cost of title insurance is justified by the work it takes to trudge through public records and underwrite ownership and lien risks.
“This is why much of the premium goes to pay the title agent or attorney staff to review title and the purchase of title data from local governments,” the ALTA wrote on its blog. “It is the title insurance company’s willingness to stand behind this work — even if the defect originated in faulty public records — that provides lenders the confidence that they have a first lien mortgage.”
Is title insurance worth it?
Despite its high cost, the question remains, is title insurance worth it when buying a home?
If you ask personal finance expert Dave Ramsey, the answer is a resounding yes.
“Never buy a piece of real estate without getting title insurance. Ever,” the radio host once asserted on The Ramsey Show. “If you’re buying it from your father, get title insurance. Period.”
Ramsey, a multimillionaire himself, built much of his wealth through real estate and claims to have invested in thousands of properties over the years. He once considered title insurance to be a “rip-off” but now swears by it.
“I have seen so many real estate titles that were clouded, which means someone that needed to sign the deed didn’t, or the wrong people signed the deed,” he said. “And it might have been three transactions ago.”
Problems can arise even from simple mistakes such as the property being listed on the wrong lot, Ramsey says.
“All kinds of crap happens. Human beings put these things together and human beings make mistakes.”
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Tips for buying title insurance
While it seems there will be no Fannie Mae pilot program, that doesn’t mean you have to grin and bear high title insurance costs when buying a home.
The Consumer Finance Protection Bureau says shopping around for title insurance — separately from your mortgage — could save you money. You may also save a bit of cash if you buy both lenders’ and owners’ title insurance from the same provider.
If you’re dead set against buying title insurance, you may have other options but critics warn that alternatives can lead to increased lender and consumer risk.
For instance, in 2022 both Fannie Mae and Freddie Mac started to accept written attorney opinion letters (AOLs) instead of a title insurance policy under limited circumstances. However, the ALTA has warned that AOLs fall short when protecting homeowners from serious financial losses.
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