title insurance and closing costs

In short

I once watched a young couple sign their closing papers with a stack of forms three inches thick, and not one of them could say what the title line on the settlement statement paid for. If you are about to buy a home, you have probably wondered about that same line. Title insurance is a one time payment that protects against old claims on the property, such as a lien nobody found or a forged signature from decades back. Your closing costs, taken all together, are the fees that gather around the sale beyond the price of the house. The lender must send you a Loan Estimate within three business days of your application, and you can compare it line by line with the Closing Disclosure you will get before closing. Ask who picks the title company, since the rules differ by state. Shop the pieces that are shoppable. Then read every line before you sign.

The whole of it

What it is

A friend of mine bought a little brick house on a quiet street and felt fine about it for six years. Then a letter arrived from a contractor who said the prior owner had never paid him. That is the sort of trouble title insurance exists for. Title simply means the legal right to own a property. A title company searches the public records to see whether anyone else has a claim on it, such as an unpaid tax bill, a lien, or a mistake in an old deed. Then it sells a policy that protects against claims the search missed.

There are two policies, and most buyers who borrow will meet both. The lender's policy protects the bank for the amount of the loan. The lender requires it. The owner's policy protects you, the buyer, for the price you paid. Most lenders do not require it, so the choice is yours to weigh. One thing sets title insurance apart from other kinds of coverage. Auto and health insurance cover what might happen next. Title insurance looks backward, at problems that already exist in the paper history of the home.

Closing costs are the other half of this story. They are the fees paid at the end of a home purchase, apart from the down payment. They include the lender's charges, the title work, the appraisal, recording fees, and often prepaid items like property tax and homeowner's insurance. They are not one fee. They are a bundle.

How it works

You have probably noticed that most insurance asks for a payment every month or year. Title insurance does not. The buyer or seller pays one premium at closing, and the policy lasts as long as the owner or the owner's heirs hold the property. The lender's policy lasts until the loan is paid off.

The steps run in a simple order. Once you sign a purchase contract, a title company or a real estate attorney orders a title search. A searcher combs the county records for deeds, mortgages, liens, and court judgments. If the search turns up a problem, such as an old loan that was never marked paid, it must be cleared before closing. The company then issues a commitment, which is a promise to issue the policy once the listed conditions are met. At closing, the premium is paid and the policy takes effect.

Who pays depends on where you live. The customs differ from state to state, and sometimes from county to county. In some places the seller traditionally pays for the owner's policy, and in others the buyer does. The purchase contract can settle the matter, so read it with care.

The federal rules matter here too. Under the Real Estate Settlement Procedures Act, a lender must give a borrower a Loan Estimate, and then a Closing Disclosure at least three business days before closing. The Consumer Financial Protection Bureau publishes plain language guides on both forms. The Loan Estimate has a section that separates the services a borrower can shop for from the services a borrower cannot. Title services often fall in the shoppable group, but the form tells you which ones, so check it.

The numbers, and where to find yours

I am not going to hand you a single price, because none exists. Title premiums are set by state rules or by the insurers, and they change with the price of the home and the state where it sits. In a few states the rates are set by the government. In others, companies file their own rates.

Your own figures sit in two places. The first is the Loan Estimate, where title charges appear under the heading for services you can shop for or services you cannot. The second is the Closing Disclosure, which shows the final amounts. Compare the two. The Consumer Financial Protection Bureau explains that some fees may not rise above the estimate, while others are allowed to change within limits. Its website describes which is which. The federal cap on how far certain fees may climb is set by regulation, so the placeholder here is the current figure, which the official source publishes each year, which the site fills in with the verified figure and date.

Your state insurance department is another good source. Many publish rate information, and a call to them can tell you how the premium is figured where you live. The county recorder's office can tell you what recording fees cost for your deed and mortgage.

A worked example

Let me tell you about a woman I will call Denise. She was buying a house for $240,000 with a down payment of $48,000, so her loan came to $192,000. The figures here are made up for the sake of the sums, so please do not treat them as real prices.

Denise got her Loan Estimate and saw these charges. The lender's fees came to $2,400. The appraisal was $550. The title search and lender's policy together came to $1,350. The owner's policy was $1,100. Recording fees were $180. Prepaid property tax and insurance came to $1,820.

She added them up. $2,400 plus $550 is $2,950. Add $1,350 and the total is $4,300. Add $1,100 and it is $5,400. Add $180 and it is $5,580. Add $1,820 and it is $7,400. So her closing costs came to $7,400, not counting the $48,000 down payment.

Then Denise did something wise. She looked at the title lines and saw she was allowed to shop for them. She called two other title companies. One quoted $1,150 for the search and lender's policy, which was $200 less than $1,350. She asked her lender whether she could switch, and it said yes. Her new total was $7,400 minus $200, or $7,200.

Notice the small habit. She did not accept the first number. She was polite about it. Nobody was offended.

Where it goes wrong

I have seen good folks stumble in a few places, and none of it is shameful.

The first stumble is skipping the owner's policy without knowing what it covers. The lender's policy protects only the bank. If a hidden claim shows up, the bank is covered and the owner might not be. Whether to buy the owner's policy is your call, and a price is attached, so weigh both sides.

The second is assuming the fees are fixed. Some can shift between the estimate and the closing table. That is why the three day wait for the Closing Disclosure matters. Compare the numbers and ask about any line that grew.

The third is believing a title search finds everything. It does not. Some problems hide, such as a forged deed, a missing heir, or a mistake in the public record. Policies also carry exclusions, which are the things they do not cover. The policy lists them, and a buyer should ask to see the list before closing.

The fourth is waiting until the closing table to ask questions. By then the pressure is high and the pens are out. A buyer who reads the documents ahead has time to think.

Questions to answer before you leave this page

Do you know whether your state sets title rates or lets companies file their own? Have you asked who in your area usually pays for the owner's policy, and what your purchase contract says about it? Did you compare your Loan Estimate with your Closing Disclosure, line by line, and circle anything that grew? Does the Loan Estimate show your title services as shoppable, and have you called at least one other company for a quote? Have you read the list of exclusions in the policy, and do you understand what it leaves out? Do you know what each fee on the page pays for, and who receives it? And if something still looks strange, who will you call before you sign, whether it is your lender, your attorney, or your state insurance department?