How Title Insurance Premium is calculated and shown on loan documents

This article is for informative purposes only. Although I believe the content is correct, this does not provide any direct or indirect guarantee. As time goes by, some information may become outdated. Always consult an expert if you have any questions concerning your real world transactions.

Title Insurance Calculation

In Texas, the title insurance premium is state regulated, but title insurance charges are a complex topic every loan originator tries to explain to borrowers. In this article, I will give you a simple example in order to help you understand. The first example is what to expect when the buyer chooses to have owner title insurance, and the second example is for if they choose not to.

Texas title companies generally sell both owner title insurance (to insure buyers) and lender title insurance (to insure lenders). If there is any defect in the title, the title insurance company will pay the loss to either the buyer or lender.

So let’s see an example of how title insurance works in a traditional residential real estate transaction. There is no law or regulation requesting a certain party to pay for owner title insurance; therefore, it is a negotiable item. In Texas specifically, it has become customary for the seller to pay for owner title insurance, and we will assume that’s the case in the example below.

Usually the owner title insurance insures the amount (coverage amount) equaling to the purchase price. For an insured amount between $100,000 and $1,000,000, the basic owner title insurance premium is calculated as following:

Basic owner title insurance premium = $875 + $(coverage amount – 100,000)*0.00554

For example, coverage amount is $300,000 (the purchase price).

Basic owner title insurance premium =$875 + $(300,000 – 100,000) * 0.00554

=$1983

The basic premium is $1983, and this is what the seller pays at closing.

There is an optional title insurance item that covers “shortages in area” in area or boundary lines, encroachments or protrusions, or overlapping improvements. This option may be paid by seller or buyer (depending on what is dictated by the contract). The cost is 5% of the basic title insurance premium. Here, let’s just say that both the buyer and seller agree not to purchase this coverage.

When a buyer uses a loan to close this transaction, the lender requires lender title insurance, and when you buy an owner’s policy and a loan policy at the same time, the loan policy is issued at a discounted price of $100. In most cases, the buyer (also borrower) will pay this cost.

Besides, the lender may need a few title insurance endorsement items, depending on the property’s situation (if it is in a zoning area, has an HOA, etc), and this part of the title insurance costs around $250.

So in this example, the total for the title insurance is $1983 + $100 + $250 = $2333. The seller pays $1983 and the buyer pays $350.

On old closing statements (form HUD-1) you can see title insurance charges listed as:

Now however, title insurance costs are shown on transaction documents; documents such as the Loan Estimate (LE) and Closing Disclosure (CD) are no longer in that way.

Why is this the case? First, when the federal government issued reforms to real estate transaction forms, it defined that both the owner’s title insurance and lender’s title insurance will be buyer’s costs. Thus, the government requires them to be shown as buyer’s costs on loan documents.

Second, since owner’s title insurance is covering the buyer, the buyer should have the option of whether to buy it or not. However, the lender’s title policy will be required as long as the buyer is using a mortgage to close the transaction.

Below, you will see how those fees are shown on the Loan Estimate and the Closing Disclosure:

On the current Loan Estimate (LE) we see title insurance items as (All showing as a part of the buyer’s total closing cost):

On the final Closing Disclosure (CD):

The total for seller-paid title insurance costs will be calculated as:  $1550.6+$432.4 =$1983, just like how it was previously calculated.

Now, you may be wondering where those numbers are from. As stated above, if the buyer/borrower decides not to purchase an owner’s policy, the buyer/borrower will pay full price for the loan policy. Since the owner’s policy is an optional item, full price for the loan policy will be disclosed on loan documents and adjustment will only be made on Closing Disclosure.

In most cases, lenders will require lender title insurance in order to cover the loan amount. Assuming the borrower pays a 20% down payment, with a $300,000 home as an example, the loan amount will be $240,000, which is also the title insurance coverage amount.

The cost formula is actually the same.

Basic lender title insurance premium = $875 + $(coverage amount – 100,000)*0.00554

The coverage amount is $240,000 ( loan amount).

Basic lender title insurance premium =$875 + $(240,000 – 100,000) * 0.00554=1650.6

The endorsement is the same of $250

The premium of Owner’s Title Policy = $1983-($1650.6-$100) = $432.4

So when the purchase contract says that the buyer is responsible for owner’s title insurance costs and the buyer chooses not to purchase it, he/she only saves $432.4. Owner’s Title Insurance is a very important insurance that we always suggest to have.

Another thing to keep in mind is that according to current regulation, a title service provider is a “can shop for” item to borrowers. If a borrower uses the title company on the lender’s written provider list, the final title fees paid at closing can’t be more than 110% of the estimated fees disclosed on Loan Estimate. If the title company is not on the provider list, then there’s no limit.

Please be aware that there are other title fees that a buyer and/or seller may pay for at closing. This article only discusses title insurance and has not covered the other ones. As every transaction is different, the real charges will be different as well. Consult your title company for details about title charges if you have more questions.

This article is for your reference only and AAXY LLC does not guarantee its accuracy. Please contact us if you have any questions or comments. For Frequently Asked Questions about Title Insurance, please click here https://www.tdi.texas.gov/title/titlefaqs.html.

Thank you for reading.