What Are These “Title Fees” on the Closing Statement? Haven’t You Already Paid Enough?
A buyer of real estate knows certain closing costs are unavoidable, including down payments, real estate taxes, transfer taxes, lender fees, mortgage interest payments, other escrows, brokerage commissions, and, of course, those pesky legal costs. The so-called “title fees” listed on the HUD-1 settlement statement (or closing statement), however, are an unwelcome surprise. After all, title insurance is an unknown to most people until they purchase and/or finance real estate. Given its price in many jurisdictions, title insurance fees can become an 11th hour headache. We are here to help demystify these fees and help you account for them ahead of time.
What Are the Various Charges Making Up Title Fees?
The most significant component of the title fee is typically the title insurance policy premium, which is the amount paid for the title insurance policy. The buyer and seller may negotiate who is responsible for paying the title premium, however, it often depends on local customs in the state where the property is located and whether the title policy is a loan policy (i.e., title insurance policy purchased as part of a financing transaction that protects the lender) or owner’s policy (i.e., title insurance purchased as part of a purchase/sale transaction that protects the buyer). The premium for a title insurance policy, unlike the premiums for other types of insurance, is a one-time payment paid at the close of escrow.
If a transaction involves a loan, the lender will require a loan policy at the borrower’s cost. The loan policy, however, does not cover the buyer of the property. Accordingly, if the buyer wants title insurance coverage, the buyer will also need to order an owner’s policy, which triggers a second insurance premium.
Purchase a Lender’s and Owner’s Policy at the same time so that the party responsible for paying the premiums can take advantage of the “simultaneous issue rate,” which is a reduced rate for a loan policy and owner’s policy issued at the same time in connection with the same property.
If you are buying all cash with the plan to take out financing later, then ask that your title insurer hold the policy “open” so you can do so. In Pennsylvania, the title insurer will be able to hold the policy open if you close again within 6 months.
Endorsements to a title policy, which often provide additional coverage or protection to the lender/buyer, vary significantly in price, and accordingly can escalate costs quickly. Lenders often have a standard package of requested endorsements, and a borrower may have little leverage to control the requested endorsements. The owner’s policy, however, does not need to mirror the loan policy (and often cannot because certain endorsements are available only for loan policies) and contain all of the same endorsements. Therefore, the buyer and the buyer’s attorney should evaluate which endorsements are appropriate to include on the owner’s policy and not merely purchase the same endorsements, to the extent available, requested by the lender.
Discuss with your title agent whether the Lender’s endorsements need to be on the Owner’s Policy. It may save costs.
There may also be search fees associated with issuing a title insurance policy. A title search is the process of retrieving documents relating to a property of real estate to determine relevant third-party interests in the searched property (i.e., who has a claim on the Property other than the current owner?). Many title companies combine the title insurance premium with standard search and exam fees. This does not mean that search fees will always be the same. For example, non-standard searches (e.g., beyond standard search periods) or searches required in order to issue special coverages (e.g., insurance over sub-surface rights, oil, coal, etc.) will result in extra title search fees. For example, in Pennsylvania title searches go back 75 years; if, for some reason, there was a concern from the 1890s, then an extra fee would be charged to go back that far.
If you ask for copies of older documents on title, make sure you understand the charge for having the title company retrieve them.
Other notable title-related costs that may be incurred in connection with real estate or loan transactions are set forth below.
- Escrow Fee: Title companies are often responsible for overseeing the closing. Title companies receive and disburse documents and funds based on escrow instructions provided by buyer, seller, and lender. The escrow fee charged by the title company for providing these escrow services is often split between buyer and seller.
- Recording Fee: Title companies review the documents to be placed of public record. Before closing, title companies make sure the documents will be accepted for recording, based on local requirements that can often be idiosyncratic. After the transaction closes, the title company also files the recordable documents (e.g. deed, mortgages, easements) in the counties where the properties are located. The resulting “recording fees” vary significantly based on the county/state. Unfortunately, recording fees themselves are not negotiable, since the government sets them. Some title companies may tack on additional charges for recording services; those additional fees may be negotiated or removed.
- Closing Protection Letter: A lender may also require a closing protection letter, which is a contract between a title insurance underwriter and a lender and protects the lender against any issues arising from a closing agent’s errors, negligence, and/or misconduct. There is typically a fee charged by the title company for the closing protection letter, which can sometimes be negotiated. A Closing Protection Letter can be unnecessary if a buyer elects to use a title company (i.e., a company directly underwrites and issues the title insurance policies) to handle its transaction rather than a title agent (i.e., subcontractors that represent one or more title companies).
Can Title Insurance Premiums and Fees Be Negotiated?
It depends on the jurisdiction. In some states, title insurance rates are set by the state’s insurance department or another agency, which means that a buyer/lender will receive similar quotes from various providers. Title insurance premium rates are likely to be similar in states such as Pennsylvania, New Jersey, and New York, because these are “rating bureau states,” in which ratings bureaus file for approval of a single rate schedule for all carriers throughout the state. Even though the title insurance premium may not vary significantly, the other title-related fees can be negotiated. In unregulated states, such as Illinois, the cost of title insurance policies can vary greatly.
How to Achieve the Best Value?
Working with a title insurer means purchasing both a product and client services. While most title policies in a given state will have the same general physical appearance, they are by no means all created equal. The initial search, if not performed by a competent searcher/examiner, may overlook vital documents of record and cause the buyers/lenders to buy their way into title claims. If a search uncovers clouds on title or title issues that compromise a transaction, the buyer/lender will want a helpful underwriter to assist with title clearance in order to preserve the transaction. Some underwriters may take an “it is what it is” attitude and make all uncovered issues exceptions to coverage (i.e., the policy holder will not be protected in the event of a claim related to the listed exceptions). A more sophisticated or diligent underwriter will work with the buyer/lender to clear up title to the property and remove documents as exceptions to title, offer affirmative coverage, or issue endorsements in accordance with its underwriting guidelines, thereby making the policy more valuable even if it is more costly.
A party to a real estate transaction should evaluate both the title company/title agency and the title underwriter. Even if the buyer/lender has a title insurance policy that provides substantial coverage, that policy is not worth the paper on which it is written if the underwriter is not financially solvent or in operation when a claim arises. Furthermore, a title underwriter that continuously denies even the most valid claims greatly diminishes the value of its title insurance policy.
Good title companies can help navigate a buyer/lender through the often treacherous waters of a real estate transaction and facilitate a smooth closing. Not only can they deliver more comprehensive insurance policies, as discussed above, they can also ensure documents adhere to local requirements, answer challenging real estate questions, comply closely with escrow requirements, accurately and securely disburse funds, and timely record documents and issue policies. The quality of these services can substantially affect the entirety of the real estate transaction and prevent potential future title issues.
Last and not least, good title companies can help you keep your legal costs down! A title company that knows how to handle issues, is organized, and gets things right the first time will not require hand-holding for an attorney. That will get your deal closed more quickly and more affordably.
In Closing (slight pun intended)
Title fees can be a significant expense on the settlement statement. Breaking out the components will help you understand what you are paying for. While some of the underlying fees can be negotiated, the best value is not always achieved by obtaining the lowest title premium. The optimal results will be achieved if the buyer/lender obtains the services necessary to facilitate a successful transaction and the title insurance coverage needed to protect your legal rights while you own the property and to help you sell the property in the future.
Sometimes, a new owner forgets that it purchased title insurance at closing, and the new owner never retrieves their policy! This delay can be created because recorders’ offices take time to return recorded documents. Remember to set up a reminder for two weeks and one month after every closing for your title company to send you the policy. After all, you paid for it.