Even after purchasing a home and moving in, you could one day receive a letter from someone who’s challenging your legal ownership of the property. The good news is that there’s a type of insurance meant to cover you and your home against claims from the past: owners title insurance.
Title insurance offers protection against financial loss if someone sues over claims like back taxes and unpaid contractor work from before the property became yours. There are two types of policies available — one intended for homeowners, and one for lenders that’s usually required. While owners title insurance is optional, it’s a good idea to weigh the potential risks of your specific situation.
Here’s what you should know to make an informed decision about getting title insurance:
- What Is Title Insurance?
- Understanding How Title Insurance Works
- How Much Does Title Insurance Cost?
- Buying a Title Insurance Policy
- Do You Need Title Insurance?
- The Bottom Line on Title Insurance
What Is Title Insurance?
Title insurance provides financial protection to either homeowners or lenders from any disputes over a property due to past claims.
A title is the legal ownership of a home that’s documented on the property deed. When you buy a home, the seller transfers the title into your name. However, it’s possible that someone else will claim they possess the rights to the home — and that’s where title insurance comes in.
The function of title insurance varies depending on who the policy is intended for: the lender or the homeowner.
Lenders title insurance
Most mortgage lenders require borrowers to buy lenders title insurance, which protects the amount they’ve loaned from any issues with the property’s title. Lenders title insurance policies only cover the amount in which the lender has a stake, so they don’t protect the homeowner’s equity. Equity represents your financial investment in the property, and is calculated by taking the home’s value and subtracting what you still owe on your mortgage.
So, if someone has a valid claim to the property, the lender will get its money back, but you won’t be covered — unless you have owners title insurance.
Owners title insurance
An owners title insurance policy covers you, the homeowner. It protects your investment in the home by compensating you for any financial loss due to a title issue. If someone sues you over covered problems with the title, the insurance underwriter would be required to defend your right to the property.
As you make mortgage payments, your stake in the property increases. If there’s a title dispute early on in your loan term, most of the ensuing financial fallout is on the lender — but more and more of your money is put on the line over time. That means the value of having lenders title insurance decreases as you pay off your mortgage, but the value of having owners title insurance increases as your equity grows.
If someone else possesses a legitimate claim to the title, then you may need to move out of the home. However, your owners title insurance would supply the funds for you to purchase another home of equal value.
Understanding How Title Insurance Works
The title company will perform a title search to confirm the legal ownership of the home, which involves examining property records and looking for issues such as outstanding mortgages, leases, or restrictions. The title company may also order a property survey, which will verify whether the home sits within its correct boundaries.
Once the company has determined that the title is valid, you’ll be issued a title insurance policy.
Who pays title insurance?
If you’re wondering who pays for title insurance, it’s typically the homebuyer — regardless of whether you’re purchasing lenders title insurance or owners title insurance. However, you may be able to negotiate with the seller about covering some of your closing costs, which include title insurance.
What does title insurance cover?
You can count on title insurance to cover:
- Legal disputes over the ownership of the home.
- Liens, or claims against the property that can serve as collateral to settle debts.
- Flawed or forged records.
- Encroachments, or outside usage of a property without prior agreement.
- Undisclosed easements, which are situations where other parties — like utility companies — have been granted the right to use the lot that the home was built on.
What does title insurance not cover?
Unlike homeowners insurance and other types of insurance that protect you from losses in the future, title insurance generally covers events that occurred before the policy was issued, like unpaid property taxes from a previous owner. Title insurance won’t take care of new issues that affect the title after you become the homeowner — like if you decide to stop paying your taxes.
How Much Does Title Insurance Cost?
Instead of paying monthly or annual premiums, you typically pay once for title insurance as part of your closing costs.
So, how much is title insurance? The average cost of lenders title insurance in the U.S. is $544, while the average cost of owners title insurance is $830. This comes out to a one-time payment of $1,374.
The cost of title insurance can vary depending on your location, the size of your mortgage, the home’s purchase price, your credit score, and other factors. However, there are exceptions. Texas, for example, requires title insurance companies to offer the same premium rate based on the property’s sale value.
It’s usually cheaper to bundle lenders and owners title insurance policies compared with purchasing them separately. You can also compare title insurance quotes and shop around for the best deal to lower your costs.
Buying a Title Insurance Policy
Here’s what you need to know about buying title insurance coverage.
Where to purchase title insurance
According to federal law, the seller cannot force the buyer to purchase title insurance from a specific company, which means you typically have a say in which company you use. If you don’t know where to start, the lender is required to provide a list of companies in your area that provide closing services, including title insurance.
You’ll want to choose a reputable title company, so it’s a good idea to ask your real estate agent for recommendations. You can also read online reviews for title companies and research key information, like how many years of experience they have.
Once you’ve picked a title company, you’ll pay upfront for lenders title insurance — and owners title insurance, if applicable — as part of your closing costs.
Understanding your title insurance quote
As you’re shopping around for a title insurance policy, make sure that you understand what you’ll be paying for.
“The insurance quote covers the preparation of the escrow documents, title search and policies to be issued regarding the transaction,” says Denny Burg, vice president and senior underwriter at Security 1st Title of Nevada, a title insurance company, based in Las Vegas.
Depending on where the home is located, the title company may provide an itemized list of fees. The amounts might not match the fees on your loan estimate or closing disclosure, but that doesn’t necessarily mean you’re getting charged more. What matters is that the total cost of the title services matches on all three forms.
Tips for buying title insurance
Here are some helpful tips when it comes to potentially saving money on title insurance:
- Compare rates. Each title insurance company has different expenses and loss experiences, so their rates differ. You can explore your options and shop around to ensure you’re getting the lowest rate for title services.
- Ask for discounts. Title companies might offer discounts for first-time homebuyers or those who bundle their lenders and owners title insurance policies, so make sure to ask about all the discounts you may qualify for.
- Remember title insurance when refinancing. If you decide to refinance your mortgage, you’ll be replacing your original loan with a new one. This could be an opportunity to save money on title insurance, as insurers may offer a lower “reissue rate.”
Do You Need Title Insurance?
If your home was built in the last few years, you might dismiss the possibility of a title issue because there haven’t been many previous owners. While it’s true that older homes can have a murkier history, a newer property could still be vulnerable to other types of claims, such as encroachments or easements.
There’s also the possibility of title fraud, which is covered by title insurance.
“As a former prosecutor and trial lawyer, who specializes in title fraud, I have seen many crazy title issues,” says David Fleck, a fraud attorney and CEO of TitleShield, a title protection company in Los Angeles. “A few years ago, I successfully persuaded a judge to cancel 18 fraudulent deeds in the title history of a single property and return the property to the rightful owner almost 20 years after the con artist swindled him out of the property.”
According to Fleck, title fraud can be one of the most devastating forms of identity theft, because it costs so much to unwind the damage.
“My best advice is always, always, always buy an owners policy of title insurance when purchasing property,” Fleck says. “Let the insurance company assume the risk that there is a problem with the property history because if there is one, you might not find out for many years, and the process to resolve the issue involves expensive lawyers.”
Ultimately, your decision to buy or forgo owners title insurance will depend on your personal situation and how much financial risk you’re willing to take on. Although it’s optional, owners title insurance could end up saving you money down the line.
Risks of not having title insurance
Forgoing owners title insurance can be a gamble, since such policies protect you against title issues that you wouldn’t know about. If it turns out there are liens on your property, you’ll be responsible for repaying the debts or the legal fees to contest them.
In one worst-case scenario, someone else has legitimate ownership of the home, and you must move out. Without owners title insurance, you wouldn’t be compensated for your loss.
“An issue that goes undiscovered could cloud the ownership of the property years after the property has been purchased,” says Jeff Harris, president of Security 1st Title of Nevada, based in Las Vegas.
According to Harris, other potential threats include unpaid construction work, an oversight by the title researcher, or even a previously unknown relative making a claim of ownership.
“Why wouldn’t you want protection on one of the biggest purchases in your lifetime?” Burg says.
The Bottom Line on Title Insurance
Despite your best efforts to learn about the history of your new home, you might not be informed of every detail, which could lead to unpleasant surprises down the line. Owners title insurance helps protect you financially from past claims against the home. While lenders title insurance is likely required if you have a mortgage, buying owners title insurance is up to you — but it’s a good idea if you want peace of mind.