If you’re like most people, 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.
What is title insurance?
Title insurance definition
Title insurance protects mortgage lenders and homebuyers 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 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.
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
There are two types of title insurance: a lender’s policy and an owner’s policy.
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. Your lender will likely require you to purchase this policy on their behalf.
Owner’s title insurance protects you, the homebuyer. An owner’s policy typically isn’t mandatory, but it’s still smart to purchase to protect your investment. Even if the seller provides a warranty deed (a document that confirms the title is clear), an owner’s policy can help cover costs in the event of a title or ownership issue.
“An owner’s title insurance policy protects what will probably be the largest single investment you make in your life: your home,” says Marissa Boyle, owner of Millennial Title Partners in Charlotte, North Carolina. “For a one-time fee, this coverage protects your property rights for as long as you own your home.”
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
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. 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, but prices can vary by state. The premium is usually paid at closing.
“Depending on the state where the property is purchased, an owner’s title insurance policy may cost from under $1,000 to more than $3,000,” says Jeffrey Zhou, co-founder and CEO of New York City-based Fig Loans.
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.
“At closing or within a very short time thereafter, the homeowner can also purchase a separate owner’s title insurance policy, usually through their title company or closing attorney,” adds Bruce Ailion, a real estate attorney and Realtor in Atlanta.
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.
Do you need 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 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.
Is title insurance a ripoff?
It’s easy to regard any insurance policy as unnecessary or a poor investment if you never make a claim or use the coverage, but doing without is a risky gamble: If an unexpected problem arises, the consequences could be financially devastating.
“[Title insurance is] not a ripoff when you consider that, for example, if you list your home for sale the buyer might find a loan or lien that wasn’t paid off, a deed that was not witnessed or a false claim of interest against your title,” Ailion says. “In these instances, your title insurance company will step in and resolve those challenges to your ownership.”
“Given that title insurance is relatively inexpensive compared to the cost of your entire property, it’s never a bad idea to have an extra layer of personal protection that guards against the worst outcomes,” says Zhou.
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 you 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.
With additional reporting by Erik J. Martin