Anyone who has bought a home likely forked over for title insurance without having a clear idea what it’s for simply because the mortgage lender required it. But what if you buy a home with cash, as many people do when they downsize at retirement? Should you get title insurance if it isn’t required?
In most cases, yes.
As the name suggests, title insurance is a type of insurance that protects the mortgage lender and homeowner against claims that the homeowner does not really own the property. That would happen, for example, if the previous owner did not have clear ownership, which would mean he or she didn’t have the right to sell the property to you.
There could have been liens on the property, or claims by contractors or lenders for loans that used the property as collateral. In some cases, the previous owner’s heirs might claim they have a legal right to the property.
In any of these situations, the title company should make sure you come out ahead, though such cases are fairly rare, and typically the title company comes to a financial settlement with the aggrieved lender, contractor or heir. Rarely is the new homeowner forced out.
Title insurance can cost hundreds of dollars, sometimes thousands, depending on the value of the property and the rules set by your state. The bulk of the expense is not the insurance itself but the title search, which looks through public records to make sure the seller has clear title.
It’s a difficult process, usually involving records kept by the town or county, and it’s not the kind of thing an amateur can do with confidence. The insurance is really there in case the title search missed something.
And, in many places, it is the title company that presides over the closing process, preparing all the paperwork and directing the exchange of checks. It can be a mystifying ritual for the buyer, and the real estate agent is typically little more than a silent bystander at this stage of the game.
Because most buyers are unfamiliar with the title insurance process, it’s common to select a firm recommended by the real estate agent or lender, who may propose a firm they prefer to deal with, even if it’s not the cheapest. But the buyer has the right to choose the title company, and can shop around for the best deal.
Some states set the price for the title insurance but may allow title insurers to add incidental fees, which can vary from firm to firm. Even if you find little variation in price, it can make sense to choose a title company that's nearby, since many home purchases involve a frenzy of paperwork in the days leading up to the closing.
To shop, look in the Yellow Pages under “Title Insurance” and “Title Companies.” And if you’re looking online, search under “title insurance quotes.”
Before signing up, be sure to get a written statement of all fees, and be sure the maximum coverage is really enough to cover your full purchase price if the worst case scenario does indeed happen and you lose your home. Also ask about riders to cover additional costs you may have incurred for improvements or additions.
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