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If you’re like most, your home will be one of the largest purchases you make in your lifetime. The last thing you want is an unexpected issue regarding ownership of the home after you complete the transaction. That’s where title insurance, an important policy for homebuyers, comes into play.
- Lender’s title insurance typically costs 0.5 percent to 1 percent of the property’s sale price. Owner’s title insurance is usually a few hundred dollars.
- The average lender’s title insurance policy costs $350 for every $100,000 of the mortgage, according to First American, one of the leading title underwriters in the U.S.
- The average owner’s title insurance policy costs $250 for every $100,000 of the home’s purchase price, according to First American.
- Despite climbing home prices, the cost of title insurance has decreased 7 percent since 2004, according to the American Land Title Association.
What is title insurance?
Title insurance protects mortgage lenders and homebuyers against problems with a property’s deed once ownership is transferred. If a title dispute arises during or after a sale, the title insurance company might be responsible for paying specified legal damages, depending on the policy.
The title to a home refers to the legal rights the owner has to the property. When you buy a home, you’ll want to ensure the property has a clear title and is free from liens or any other ownership claims. If not, as the new owner, you could be responsible for remedying these issues if you don’t have title insurance.
When getting a mortgage, lenders typically require the borrower to obtain a lender’s title insurance policy (sometimes called a loan policy), which protects the lender should claims to the property arise. Owner’s title insurance, a separate policy, is usually optional. This protects the buyer from any claims to ownership. Some states have fixed lender’s title insurance premiums, while others are dictated by the market, giving homebuyers freedom to shop around and save.
How title insurance works
Getting title insurance is generally a two-step process.
First, a title company performs a title search to ensure the property you want to purchase has a clear title. In short, confirming a clear title means making sure that the party selling the property truly owns it and has the right to sell it. If a defect or other issue arises, the title company will make you aware of it.
Once the company completes the search, it assesses any issues, as well as potentially previously undiscovered ones, and then offers a quote for a title insurance policy based on those risks. If a title has many defects, the company might decline to offer a policy.
Types of title insurance
|Lender’s (loan) title insurance||Owner’s title insurance|
What does title insurance cover?
Title insurance can protect the lender and the homebuyer from having to fix defects with a property’s title, such as:
- Liens stemming from contractors who worked on the home and weren’t fully paid, unpaid homeowner’s association dues or other outstanding debts
- A falsified or forged deed or documents and other fraud-related issues
- Disputes pertaining to ownership, such as an unknown heir
For example, if you buy a property from a deceased person’s estate, and an unknown heir later makes a claim that they own the property and that it was improperly sold to you. The title search process would have likely turned up evidence of the heir before the transaction closed. If not, title insurance would help cover costs related to settling the heir’s claim.
How much does title insurance cost?
Lender’s title insurance is a one-time premium that averages between 0.5 percent and 1 percent of the home’s value, but prices can vary by state. The premium is usually paid at closing. Owner’s title insurance is a separate policy that typically costs a few hundred dollars.
Is title insurance worth it?
Title insurance policies protect the lender and you from lawsuits related to property ownership disputes. While the cost might not seem worth it, it’s a shield against possible future litigation.
Risks of not having title insurance
Mortgage lenders almost always require homebuyers to purchase a lender’s title insurance policy. To protect yourself from having to be responsible for title issues, you also have the option to purchase owner’s title insurance, which is separate from the lender’s policy.
If you don’t purchase owner’s title insurance and an issue turns up in the future, you’ll likely be responsible for correcting it, which can be costly. For example, if the previous owner had unpaid property taxes, the municipality might place a lien on the property, which can’t be removed until the back taxes are paid.
How to buy title insurance
You can purchase a lender’s title insurance policy through a title company of your choice. Note that your lender or real estate agent might recommend a company, but you’re not obligated to use that provider.
If you pay cash for the home or otherwise don’t finance the purchase with a mortgage, you’re not obligated to buy a lender’s title insurance policy.
How to shop for a title company
You’re not required to work with the title company your lender or real estate agent recommends, so shop around. You might find that your lender’s affiliate has the best coverage or lowest cost, or learn that another company has a better offer.
You also might want to use a different title company than the one the seller chose, so that a different business can conduct the title search.
Overall, you’ll want a reputable, stable enterprise that you can expect to be around decades after you buy your home. As you compare providers, don’t be afraid to ask prospective companies if they’ve had any claims and if they have any insurance protection in place for their own business.
Also, ask the title company if you’re eligible for discounts. It might offer programs for first-time homebuyers, for instance, or other ways to help you save money.