If you’re like most people, your home will be one of the largest purchases you make in your life. 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.
What is title insurance?
Title insurance definition
Title insurance protects homebuyers and mortgage lenders against defects or problems with a title when there is a transfer of property ownership. If a title dispute arises during or after a sale, the title insurance company may 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, or free from liens or any other ownership claims. If it isn’t, as the new owner, you could be responsible for remedying any issues if you don’t have title insurance.
How title insurance works
Getting title insurance is generally a two-step process.
First, a title company will perform a title search to make sure the property you want to purchase has a clear title. In short, confirming a clear title means making sure that the person 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 confirms a clear title or identifies issues, it begins the underwriting process. This involves assessing any issues, as well as potentially undiscovered ones, and then offering a quote for a policy based on those risks. If a title has many defects, the title company may decline to offer a policy.
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 that have done work on the home and weren’t fully paid, unpaid homeowner’s associations 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
Say 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, but if not, title insurance would help cover costs related to settling the heir’s claim.
How much does title insurance cost?
Title insurance is a one-time premium that averages between 0.50 percent and 1 percent of the home’s value. Title insurance may or may not be regulated in your state, so prices can vary. The premium is usually paid at closing.
Do you need title insurance?
Most mortgage lenders require homebuyers to purchase title insurance, but only a specific type of policy that protects the lender, not the buyer. This is known as lender’s title insurance. To protect yourself from having to be responsible for title issues, you 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.
Lender’s vs. owner’s policies
As its name implies, lender’s title insurance primarily protects the lender from liability, usually for the life of your mortgage, if title defects come up. Owner’s title insurance protects you, the homebuyer. An owner’s policy typically isn’t mandatory, but it’s still a good idea to purchase it to protect your investment. Even if the seller provides a warranty deed, a document that confirms the title is clear, this policy can help cover costs in the event of an issue.
How to shop for a title company
You’re generally not required to work with the title company your lender or real estate agent recommends, so shop around. You may find that your lender’s affiliate has the best coverage or lowest cost, or another company has a better offer.
You may want to use a different company than the one the seller worked with, as well, in order to have a new company conduct the title search.
Overall, you’ll want a reputable, stable company that you can expect to be around decades from the time 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 of their own.
Also, ask the title company if you’re eligible for discounts. They may offer programs for first-time homebuyers, for instance, or other ways to help you save money.