Title Insurance

A condition of almost every home loan is that the borrower takes out title insurance. The only purpose for title insurance is to cover the lender in the rare case where the law firm or title firm doing the title search for the home make an error.

What is Title Insurance

When you buy a home a law firm or Title Company will be hired by the lender to research the title of the home you are buying and they are lending on to ensure that the title is clear of liens and encumbrances other than those that will be paid off by the loan proceeds.If your home loan closes and the title agency made an error by saying overlooking an outstanding lien for $100K the fact that this lien predated the mortgage that you took out makes it the senior lien. 

This puts the bank who holds what it thought to be a first mortgage holder second in line or second mortgage holder. This is a scenario that most banks are not willing to find themselves in so they demand that as part of the financing package that you the borrower pay for a title insurance policy equal to the amount of the  mortgage to protect them in the event of an error by the title examiner. 

You might be forgiven for thinking that the bank or the title examiner should pay for this insurance but as with all things corporate it makes more sense for the consumer to pay up front and in full. 

How Much Does Title Insurance Cost

The cost of title insurance varies from State to State but usually costs in the region of .5% of the mortgage cost. In a $500,000 transaction the cost of title insurance to cover the lender would be in the region of $2000 to $3000.Also it should be remembered that this title insurance is totally for the lenders protection. It will not in any way benefit you the borrower who is paying for it. In most real estate transactions the borrower will be offered the opportunity to buy an additional title insurance policy to protect their interests. An owner’s policy of title insurance will usually be for the purchase price of the home whereas the lenders title insurance will be for the mortgage amount. 

It is interesting to note that the closing attorney who act as agents for the title insurance company will typically get 70% of the premium you pay for title insurance as a commission. 

Do I Need Title Insurance

The sad reality of buying a home for most people is that they need a home loan to facilitate the transaction. Because you need a home loan and the bank requires home loon insurance you basically have no choice but to pay for the banks title insurance policy. 

It should be a given that like any other industry the title examiner who is paid to perform a title search should be liable if they make a mistake but unfortunately this is not the case in the mortgage lending industry. 

The bank requires title insurance and you as a captive borrower are left to foot the bill.