When it comes to purchasing real estate, title insurance is an essential component of the transaction. It’s important that all parties understand what title insurance is and the benefits it offers buyers and mortgage lenders, as well as who is responsible for paying the premium. Who pays the title insurance premium isn’t always a straightforward answer, as it can vary based on where the transaction takes place or the specific terms of the real estate contract. In this blog, we’ll delve into the cost of title insurance, who typically pays and why.
The Cost of Title Insurance
Title insurance is a one-time cost paid at the closing when purchasing a property or refinancing the mortgage loan tied to real property. Unlike other insurance policies, it does not require a monthly or annual premium. There are two types of title insurance policies:
• An owner’s policy protects the property owner from covered title defects that existed prior to the date of the policy. A property owner can also opt for more enhanced coverage, including matters that may transpire after the date of the policy. If a valid title claim is filed, the owner’s policy, subject to its terms and conditions, will cover financial loss up to the face amount of the policy.
• A loan policy (often referred to as a lender’s policy) ensures that the mortgage lender has a valid, enforceable lien on the property. Most lenders require borrowers to purchase a loan policy to protect their investment. A loan policy provides no coverage to the property owner.
The cost of title insurance is related to the value of the property. For an owner’s policy, the price is based on the property’s selling price, while a lender’s policy is based on the amount of the mortgage loan. The cost of title insurance varies by state but typically ranges from 0.5 to 1 percent of the property’s purchase price. For example, in the event of a $500K property purchase, title insurance could cost between $2,500 and $5,000. Title insurance underwriters may apply a reduced rate when both an owner’s and lender’s policy are issued simultaneously at closing of a purchase transaction. They may also offer a "reissue rate” for the issuance of a new lender’s policy for a refinance on the same property.
In many states, title insurance companies are required to submit title insurance premiums to the state’s insurance department to ensure that title insurance premiums are reasonable, non-discriminatory and protect customers. In most states, title insurance rates are established by each individual title insurance underwriter and then filed with the state’s title insurance department. This means that rates can be modified by the underwriter at any given time as they are not set by state law. In some states such as Florida, New Mexico and Texas, title insurance rates are promulgated, which means they are set by the state’s insurance commissioner and therefore cannot be modified.
Who Pays?
The party that pays the title insurance premium is a matter of local custom and practice. Who pays for title insurance will depend on where the transaction takes place. The buyer, the seller, or a combination of the two is responsible for paying the premium.
1. Buyer responsibility: In most cases, the buyer assumes the cost of the lender’s title insurance policy. When it comes to the owner’s title insurance policy, although the buyer directly benefits from the policy, in some areas they are not required to pay for it.
2. Seller contribution: In 26 states, the seller holds the responsibility of paying the premium for the owner’s title policy. This local custom is referred to as a “seller pay” area. Even if the transaction does not take place in a seller pay area, the seller might offer to pay for the owner’s title policy as an incentive to attract buyers or facilitate a smoother closing process.
3. Split arrangements: Sometimes the parties decide to divide the cost. Both parties may benefit from this arrangement. It lessens the seller's financial burden, while providing protections for the buyer.
Both buyers and sellers should consult with their real estate agent or closing agent early in the real estate transaction to confirm the custom and practice in the area. Doing so can help mitigate any misunderstandings about who is generally responsible for paying the title insurance premiums. It can also help buyers and sellers leverage any negotiations. At the end of the day, who pays title insurance premiums can always be negotiated between the parties.
Conclusion
Purchasing real property can be an exciting endeavor, but it can also be intimidating. Having title insurance allows you to rest easy knowing that your property is safeguarded. Understanding who holds the responsibility of paying title insurance premiums early in the real estate transaction can also help manage expectations or ease concerns. If you need assistance identifying the custom and practice of who pays for title insurance premiums in your area, contact your local Old Republic Title representative today.