Title insurance protects the holder from financial loss related to a major purchase, such as a home.
More of a risk prevention than a risk assumption (the model for most insurance policies) form of insurance, title insurance covers the history of the policy-holder’s home, examines that history for any trouble spots that could damage the value of the home, and highlights those potential issues before the buyer purchases the home.
Potential disputes and defects covered by title insurance include:
- Adverse ownership claims.
- Financial liens against the property.
- Unpaid taxes or assessments
- Damage to the property the buyer and the mortgage lender didn’t know about.
- Forgeries or fraud in the chain of title
- A mistake/error in the home’s title records
- Easements and right-of-way issues that could harm the property owner financially.
- If the buyer refuses to go through with a home purchase based on issues and condition of the title.
Why You Need Title Insurance
That’s why the need for title insurance is so important to homebuyers. If any of the above issues arise and aren’t detected, it usually falls to the new homeowner to make financial amends, often at great financial cost.
In fact, homebuyers require title insurance more than they might know. According to the American Land Title Association, title insurance examiners find issues that could impact a property negatively – and cost the homebuyer large sums of money – 25% of the time.
It’s not just the new homebuyer that gains a financial firewall with title insurance. The actual mortgage lender needs title insurance to protect themselves against a home’s defects or potential disputes between buyer and seller that could result in the lender suffering financial loss before the home sales transaction is completed.
Imagine purchasing a new home only to find out that back taxes are owed on the property and remain unpaid. Without proper title insurance, the new homeowner is now likely responsible for payments on any back taxes owed on the property. If those payments aren’t made, the homeowner may lose the home to the party that taxes are owed.
How Title Insurance Works
Title insurance really isn’t all that complicated.
To fully understand how title insurance works, you first need to understand the title attached to a home.
By and large, a home title is a document (or documents) that proves the title holder is the actual owner of the property in question.
The home title includes a variety of data points that proves ownership of a home, including:
- The property abstract (also known as the chain of title).
- Any potential encumbrances liked to the home, like right-of-way or easement issues (i.e. like a path for beach goers can take through a property to reach the beach.)
- Liens (tax or otherwise) attached to the property by creditors.
- The title is public and is usually stored in a local government office with other archived documents, and is accessible to anyone who wants to view the title.
You can’t gain title to a home (or the home itself, for that matter) without first having a licensed and reputable home title specialist review the title and ensure the home has no disputes or defects attached to it that may lead to financial loss to the homeowner and to the mortgage lender.
With a cleared title, the homeowner can safely and securely move on the completion of the home purchase transaction, but will need to buy title insurance just in case something that wasn’t covered pops up after the home transaction is completed.
Once the home title is clear and secure, the real estate agent will assist the homebuyer by having an insurance professional set up an escrow account (a financial account where funds are held by a third party) for title insurance once the home purchase is completed.
Once the home title has been recorded and the escrow account funds are paid out to the appropriate parties, the title insurance can then be purchased for full protection of the home before the purchase is completed.
Typically, homebuyers can count on working with one of five U.S.-based title insurance underwriters:
- Fidelity National Financial
- First American Corp.
- Old Republic National Title Insurance Co.
- Stewart Title Guaranty Co.
- Various regional independent insurance firms.
Make sure to ask your real estate agent, or the seller’s agent, for advice on which underwriter might work best for you.
The Cost of Title Insurance (and Who Pays)
Unlike most consumer insurance policies, title insurance comes with a one-time-only charge and does not require the policy holder to pay a monthly bill for the insurance protection.
In most cases, the home buyer pays for both his or her own title insurance, plus the mortgage lender’s title insurance, too. In some cases, that payment can be negotiated by the buyer and the mortgage lender in the course of a new home mortgage deal.
It’s also worth noting that in some states, the home seller is required to pay for title insurance, as a way of stating the home is free of defects and disputes.
Buyers of home title insurance can usually expect to pay around $1,000, or in some cases 1% of the purchase price of the property. Note those figures vary by a state-to-state basis. To be perfectly clear what title insurance may cost you, contact your state insurance commissioner’s office before you seal the deal on a new home purchase.
Owner's title insurance usually costs about 1% of the purchase price of the property, though this can vary from state to state. For example, the owner's title insurance for a $500,000 property in California should cost between $1,200 and $2,000.
The National Association of Insurance Commissioners has a handy map/list of insurance commissioners in each of the 50 U.S. states.
Type of Title Insurance
Basically, there are only two types of title insurance, as follows:
Owner’s title insurance (also known as the “Owner’s Policy.”) – This type of title insurance guards the buyer against any financial losses suffered in the purchase of a new home due to disputes, defects, and other financial issues.
An owner’s policy may be needed as an “add on” to title insurance purchased for the mortgage lender. The owner’s policy usually amounts to the total cost of the real estate purchase price and runs for as long as the homeowner continues to own the property, or transfers the home to an heir or other family owner.
Lender’s title insurance (also known as a “Loan Policy.”) – A lender’s title insurance policy protects the mortgage lender’s financial investment in the home and property. Like an owner’s policy, a loan policy is also issued in the same amount as the purchase price of the home, but any liability does dissipate as the homeowner makes regular mortgage payments toward the purchase of the home, and the total mortgage debt declines.
The Takeaway on Title Insurance
Title insurance is a valuable form of insurance protection that protects both the homebuyer and the mortgage lender against possible financial losses attached to a new home and property.
Like most forms of consumer insurance, a title insurance policy may be boring in structure and may cost you $1,000 or more to purchase the policy, but if you need it – you’ll be glad you have title insurance.