Title insurance: What is it and do I need it?
Fact-checked with HomeInsurance.com
Title insurance is a term you may come across when purchasing a house, but you may not be familiar with exactly what a title insurance policy is and what it covers. This article addresses both of those aspects of title insurance, in addition to explaining how it works, and whether or not you need it.
What is title insurance?
Title insurance is a type of coverage that protects either you as the buyer/homeowner or your mortgage lender from the costs that would be associated with a title that has a defect, such as a lien.
But let’s back up for better context. The title is the statement that indicates your ownership of a property. A “clean title” is one that simply indicates that you own the property without any encumbrances against it. A “dirty title,” indicates that some outside party has a legal claim of some kind against your home.
That claim may be caused by anything from a contested will to unpaid property taxes by the previous owner. Whatever the cause, title insurance will pay the necessary claims and legal fees. Unlike homeowners insurance, which protects you against future incidents, title insurance protects you from something that has happened in the past.
What does title insurance cover?
Title insurance protects you or the mortgage holder from a broad range of issues that may arise around the ownership of the property. Some of these include:
- Unpaid taxes or assessments
- Fraud or forgery
- Accidental errors on the title or other documents
- Unpaid liens or legal judgments
- Conflicting wills, or unknown heirs to the property
- Bills for past contract work
Title insurance doesn’t cover everything: it won’t pay for any defects resulting from government regulations — such as those relating to zoning or water rights — or from defects that were known to the insured before the property was purchased, and it won’t play a role if there are unrecorded liens which are not part of the public record.
You may be able to purchase an enhanced owner’s policy, which includes more coverage than the standard level — but at a higher cost. Ask your insurance agent if this would be a good option for you.
Who needs title insurance?
A title insurance policy is an important consideration for anyone purchasing a home and property. Defects in title are surprisingly common, and although they may be discovered during the purchase process, they can also come to light years later.
Your mortgage lender will undoubtedly have a title policy in place from the time they initiated the mortgage. You should also consider purchasing a policy to protect your own investment, especially once you have paid off the mortgage and own the house yourself.
How title insurance works
Generally, the process of purchasing title insurance starts with a thorough review of the public record by your mortgage holder. The cost for this will probably be considered a closing cost, and the search will be completed before your lender agrees to the loan.
Sometimes defects in the title are discovered well after the sale, and in this case, your title insurance kicks in. For example, if it is discovered a decade after you purchased the home that unpaid back taxes are owed, your title insurer will pay those, as well as any associated legal fees.
Types of title insurance
There are two types of title insurance, depending on your stake in the property. The first is lenders title insurance, which covers your mortgage lender’s interest in your property. This will stay in place as long as your mortgage is active. Your lender will do an active title search when you apply for a mortgage; the title insurance gives them further protection against any title defect.
The second type is owner’s title insurance. This is optional, but you may purchase it when you buy your property to protect yourself. It stays in place as long as you own the property. It’s worth noting that lenders insurance protects only your mortgage holder; you need to also have owner’s title insurance to protect your own finances in the event of a defect that is discovered after you purchase your home.
How much does title insurance cost?
Title insurance may cost anywhere from $500 up to $3,500, and averages about $1,200, according to the U.S. Department of Housing and Urban Development. The rates depend on the value of the property and other factors. The costs of title services and insurance are usually rolled into closing costs to be paid when the property is purchased.
How to purchase title insurance
Your mortgage lender will manage their own purchase of title insurance from their preferred vendor. If you want to purchase an owner’s policy, you’ll make that decision before your closing date. Your lawyer may handle it for you, or you can shop around yourself to find the best rate. Here are a few factors to consider:
- There are four primary title insurance companies: Fidelity National, Old Republic, First American and Stewart Title.
- It’s a good idea to get quotes from at least three of these companies, as well as whatever company your mortgage lender is using (you may get a discount if both policies are from the same company).
- Make sure your quotes are all for exactly the same coverage.
- Review the financial strength of the company you’re considering at AM Best. Most insurers include their rating on their website — it’s usually recommended to look for a company that is rated at least “A-” or higher.
- Purchase your policy through your chosen company’s agent, with your closing date as the start date of the policy.
- Title insurance covers you as the homeowner, and your mortgage lender, from title defects such as liens or unpaid back taxes.
- Your mortgage lender’s policy will remain in effect as long as you are paying your mortgage; the costs for it will be rolled into closing costs.
- It’s suggested to have an owner’s policy as well, since the lender’s policy doesn’t cover you from claims on your title.
- Title insurance costs an average of $1,200, and can be purchased through one of four national companies.
Title insurance is a way of protecting property owners, whether individuals or financial organizations, from the costs involved in having a “dirty title.” factors such as liens and unpaid taxes can saddle the owner with debt, but title insurance covers the costs and makes it possible to have a clean title with no defects.