Is Title Insurance Required? New Alternatives for Homeowners in 2024

Homeownership has become increasingly out of reach for many Americans as housing costs continue to rise and interest rates remain high. A recent analysis by Redfin underscores the reality that the dream of owning a home is slipping away for many as purchase prices outpace income and savings. While home prices largely dictate affordability, closing costs also present an obstacle for many. Buyers must come to the closing table with thousands of dollars, in addition to their down payment, to cover these costs.

One of the largest components of closing costs is title insurance. Many buyers are not aware of this until they are well into the closing process of buying a home or refinancing their mortgage. Even after they are made aware of the cost, buyers are often left to determine what it is they are paying for and whether a better option is available. This leads many buyers to ask the question: Is title insurance required?

To answer this question, we will look at what title insurance does, how it has evolved, and why alternative solutions are gaining popularity.

What is Title Insurance?

Title insurance was created to protect mortgage lenders and homeowners from losses caused by lien priority issues and defects in title, such as liens, encumbrances, claims of ownership by third parties, and fraud.

This protection comes in the form of two separate types of title insurance policies that are issued after a title search is completed, a lender’s policy and an owner’s policy. The lender’s policy protects the lender’s interest in the property and insures lien priority, while the owner’s policy protects the homeowner against certain title defects.

The buyer is typically responsible for the cost of both policies (with the exception of some parts of the country, where the seller may cover the cost of the owner’s policy).

Do I Need Title Insurance?

Most people assume title insurance is required because it has appeared on loan estimates and settlement statements for as long as anyone can remember. However, this is not always the case, and buyers often have more options than they realize.

Is Lender’s Title Insurance Required?

If a lender is involved in the transaction, whether it is a purchase or refinance, the lender typically requires that its interest in the property be protected. Additionally, investors purchasing mortgage loans in the secondary market may refuse to purchase loans without title protection, so lenders who intend to sell the loans they originate will require title protection for this reason.

Until recently, when title insurance alternatives entered the scene, this title protection was only widely available in the form of a lender’s title insurance policy.

Is Owner’s Title Insurance Required?

In contrast, a buyer is not required to purchase an owner’s policy when buying a home, though most real estate agents strongly recommend it to protect against potential losses that may arise in the future. 

However, as with any other product a consumer may wish to purchase, the buyer has the right to shop around for the best deal and is not required to buy the policy that the title company recommends. Unfortunately, most buyers are not aware of this right to shop around or are unsure of how to go about shopping, so this rarely occurs in practice. 

Was Title Insurance Always Required?

Until recently, title insurance was generally the only option available to provide the title protection required by lenders and recommended for buyers. With the four largest title insurance providers generating more than 70% of the industry’s revenue, there has been little competition. 

With the introduction of the insured attorney opinion letter (iAOL) as an alternative to title insurance, this is no longer the case. In an effort to promote more affordable homeownership, Fannie Mae, Freddie Mac, and the VA have updated their guidelines to allow for the use of these iAOLs as an alternative to traditional title insurance in eligible transactions. These initiatives are indicative of an evolving landscape where traditional requirements are being reconsidered in favor of more cost-effective alternatives.

Notably, real estate transactions relied on attorney opinion letters to validate title before title insurance was created. [History of Title Insurance | First American] Because these traditional opinion letters had inherent limitations, they were ultimately replaced by title insurance in 1876.

What Has Changed?

However, in the same way that title insurance was created to address a need in the market, the modernized attorney opinion letter has been adapted to address the need for a more cost-effective alternative to title insurance.

The iAOL is driven by automation and digitized data to make it scalable, and it is backed by transactional liability insurance to directly align the cost with the risk being covered. It also combines protection for the lender and owner for a single flat fee, making it more cost effective than traditional title insurance.

In contrast, title insurance rates vary significantly by state, as they are determined in accordance with state title insurance regulations. In some states, rates are mandated by law, which means that a title insurance company cannot offer reduced rates. In other states, rates are filed, which means they may be determined by a centralized rating bureau or by individual underwriters. This is the reason for the large discrepancy in title insurance costs from one state to another.

Are There Alternatives to Title Insurance? 

What Are My Options? 

Understanding your options is the first step in making an informed decision when it comes to protecting your most valuable investment. 

Remember that buyers have the right to shop around for title services and that traditional title insurance policies are not the only option. Lenders and agents often recommend providers that they have longstanding relationships with, but the buyer is not obligated to use these providers if they do not offer all available options or the best deal. 

Industry leaders, including Freddie Mac and Fannie Mae, have endorsed the use of the iAOL, acknowledging the viability of alternative products to provide comparable protection at a lower price. Simultaneously, the Consumer Financial Protection Bureau has launched an initiative to investigate the validity of fees driving up closing costs for borrowers, including title insurance.

When considering options for title protection, buyers should work with a lender that offers multiple options and confirm with their lender that they are using a reputable provider that offers coverage substantially similar to title insurance. Not all attorney opinion letters provide the same coverage. To provide sufficient protection and peace of mind from title issues, an AOL should be backed by liability insurance that is reflective of the modern mortgage market, like the AOLPro, which is now offered nationwide by multiple providers.

How Much Can I Save?

According to Fannie Mae data, using an AOL in lieu of title insurance saves borrowers more than a thousand dollars on average in a refinance transaction. The potential for savings is even greater in a purchase transaction.

To illustrate the financial benefits of using an iAOL instead of traditional title insurance, we’ve highlighted the savings in three particular transactions.

• For a high-value property with a $700,000 purchase loan in Florida, the buyer saved $4,225 by using an iAOL (AOLPro) instead of title insurance.
• For a Midwest property with a $675,000 purchase loan in Ohio, the buyer saved $2,743 by using an iAOL (AOLPro) instead of title insurance.
• For a property with a $392,000 purchase loan in Pennsylvania, the buyer saved $2,403 by using an iAOL (AOLPro) instead of title insurance.

Although savings will vary by property transaction and location, the potential to save more than a thousand dollars is meaningful to any buyer in the current economic climate. 

What Is The Bottom Line?

As the demand for housing affordability and transparency grows, the industry is experiencing a much-needed shift to a more diverse market, where a buyer can make their own choice to use a more cost-effective alternative without compromising security.

The best example of this is the industry’s acceptance of the iAOL as an alternative to title insurance. Although this initiative has gained momentum and garnered attention relatively recently, it has been years in the making. It is a positive development that encourages competition and drives innovation, which ultimately leads to better service and pricing for consumers.

About Alita Group

Alita Group is a trailblazer in the landscape of title insurance alternatives. Our mission is to make homeownership affordable by reducing closing costs for consumers. In doing this, we help our clients prioritize their financial well-being. With a steadfast commitment to transparency and informed decision-making, we serve as a valuable resource for both homeowners and lenders.