If you're winding down on a home purchase, it's easy to think of title insurance as just another line item in an otherwise costly and paper-heavy process.
Title insurance, coverage that protects buyers and lenders from problems with the ownership to a piece of real estate, is an essential part of the home-purchasing process. Banks generally won't give you a mortgage unless you have this insurance in place.
The one-time upfront cost of title coverage generally is low compared to the overall price tag on your new home. Title search services and title insurance fees, which are often bundled together, can add up to 1 percent of the amount you borrowed — or more, according to NerdWallet.
It's a small price to pay when you consider what's at stake: Title defects, including phony deeds or surprise heirs to the home, could throw into question your claim to the property and lead to costly legal fees if you wind up going to court. Title insurance protects against those risks.
But before you buy, do your due diligence on title coverage. Here are some things to consider:
The title insurance world is a relatively small one.
There are four top players: Fidelity National, First American, Old Republic and Stewart Title. Together, these insurers account for 87 percent of the market, said Jeremy Yohe, vice president of the American Land Title Association.
As individual states regulate insurance, you'll find variations in the market. For instance, some states require all insurers to charge the same rate. That's the case in Texas and Michigan, for instance.
States also determine who can sell you title coverage: Licensed title insurance carriers, agencies and agents offer coverage in most locations, but other states permit attorneys to sell policies.
You'll even find variations in the market within a given state.
"In southern New Jersey, you go to a title company, and they'll do everything," said George Holler, principal at Holler Law Firm in Milford, CT. "In northern New Jersey, you'll go to your lawyer, and they'll usually have an ownership interest in the title company."
This 2015 survey from the National Association of Insurance Commissioners sheds light on different state practices for title insurance.
Obtaining title insurance is just part of the closing process.
Aside from buying coverage, you'll also need someone to perform a title search and exam — the process in which your attorney or your title agent will look for issues related to the property, including any outstanding liens. Once any defects with the title have been resolved, there's the escrow and closing.
In some states, title agents are permitted to handle most or all of this. As a result, in those locations, the pricing for the insurance will include all of those steps. Other states un-bundle the services and costs.
Holler shared the following breakdown of fees for a hypothetical $450,000 home purchase in Milford, CT:
Attorney fee: $650
Title search: $175
Title insurance: $1,608
"In Pennsylvania, rates are all-inclusive," said Yohe. "In Ohio, the rates are separate."
You should also know what kind of coverage you're purchasing.
There are two policies: One covers the lender, and the other policy covers the home buyer. In some states, the prospective home purchaser will shell out for both policies, but in others, the seller will pay for coverage on the buyer.
Based on your local market, you may have a shot at savings on the final steps toward closing on your home.
Here are some suggestions to bear in mind as you get ready to close:
- Shop for a title company to handle the search and insurance: Even if your state sets regulations on pricing and your list of available carriers is limited, they can still compete on service.
"The more service the title company will provide and the collaboration they have with the lender or the mortgage broker — I encourage clients to focus on that," said Nick Defenthaler, a certified financial planner with the Center for Financial Planning, a wealth management firm in Southfield, MI.
- If prices are set by your state, negotiate with your seller: If you can't lobby for lower costs on title coverage, see if your seller is amenable to covering some of your closing costs, said Chris Ling, head of homebuying and mortgages at NerdWallet.
- Be aware of other discounting opportunities: You may not be required to buy a title insurance policy for yourself, but if you do obtain coverage for yourself and the lender, ask about a simultaneous issue discount, said Ling. Also, you may be eligible for a reduced "reissue rate" if your home had title insurance issued on it in the last decade.
- Know your agents' and attorneys' cybersecurity practices: If you're working with a local lender, title agent or attorney for the closing, ask about their data security, said Holler.
"You're in a $750,000 transaction: Are you going to turn it over to someone who's working out of their dining room with a Yahoo email account?" he asked. "How is your closing provider protecting your data? Where will your data be stored?"