Most homebuyers know they’re required to take out title insurance, but many remain uncertain about why this is so - or even what title insurance is. While that might seem like a moot point considering most mortgage lenders select title insurance for home buyers, you can’t write it off as just another fee to pay at closing because understanding how title insurance works and what leeway you have in selecting it could save you a lot of money.
This guide will introduce you to the basics of title insurance and make you a smarter homebuyer in the process.
What is title insurance?
A home’s title is used to legally establish ownership over the property, and title insurance protects both buyer and lender from loss if an ownership dispute occurs by ensuring the title is binding and absolute.
Here’s how it works. The title insurance company (which either you or your lender will select) will search public records concerning the property you intend to buy – such as liens, claims, deeds, tax records ad maps. If there are no problems in the title’s ownership history then they will deem the property ready for purchasing and allow you to take out a title insurance policy covering your legal claim to the property. If in the future an ownership dispute should ever arise, the insurance company would handle the legal proceedings and pay both you and your lender in the event of a loss (if you had owner’s title insurance, described below).
For example, if a previous owner of your property came from out of the blue and decided to contend your ownership, your title insurance company would step in and handle the legal dispute. Your insurer would then be responsible for any losses and costs stemming from the court case.
While most insurance policies require an ongoing monthly or yearly premium, title insurance is covered by a single one-time premium paid at closing when you purchase your home. Unlike other insurance products that you can drop and switch at a moment’s notice, title insurance is a long-term policy that lasts as long as your current mortgage or your ownership in the home. Title insurers are able to offer indefinite protection because they eliminate risks and prevent losses in advance through extensive searches of public records and thorough examination of the title.
Title insurance is designed to make sure when you close on your purchase, you are the legal owner, and no one has liens, claims, easements or restrictions on the property other than the mortgage you agree to pay. It also ensures all funds are properly transferred and the seller pays any outstanding expenses.
Title companies provide services to buyers, sellers, real estate developers, builders, mortgage lenders and others who have an interest in a real estate transaction. Title companies provide assurances that the transfer of title takes place efficiently and that your interests as an insured party are protected under the terms and conditions of the policy.
Types of Title Insurance
There are two distinct types of title insurance policies: an owner’s policy and a lender’s policy.
- Lender’s Title Insurance – the most common type, almost every mortgage lender on the market will require a borrower to have a title insurance policy at closing. A lender’s title insurance policy will cover the lender’s interest in the house in case of a legal dispute in the future. If for instance, you lost your case in court, and only had lender’s title insurance, your title insurance company would pay out money to your mortgage lender covering their losses, while you would not receive any compensation.
- Owner’s Title Insurance – less common, but equally important, an owner’s title insurance policy protects the homeowner in addition to their mortgage lender. To get an owner’s policy, a homebuyer would have to pay an extra fee, though many title companies offer a discount if the homebuyer buys both types of policies at the same time.
What does title insurance cover?
Before you purchased your home, it may have gone through several ownership changes. What’s more, the land on which it stands probably changed hands many times over the years. There may be a weak link at any point in that ownership chain that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or someone three owners ago might have failed to pay real estate taxes. Title insurance covers the insured party for any claims and legal fees that arise out of such problems. Typical claims covered under an owner’s title insurance policy include:
- Someone other than the insured who owns an interest in the property
- Forgery, fraud, undue influence, duress, incompetency, incapacity, or impersonation
- Defective recording of a document
- Restrictive covenants
- Undisclosed liens due to a deed of trust, unpaid taxes, special assessments or homeowners association charges
- Unmarketability of the title
- Lack of access to and from the land
It’s important to ask your title insurance agent to explain what is and is not covered under your title insurance policy as well as to verify they’re right by reading it over yourself.
Perhaps the most important value of title insurance is the peace of mind it brings. By acquiring your policy, you derive the important knowledge that recorded matters have been searched and examined so that title insurance covering your property can be issued. Because title insurance companies are risk eliminators, the probability of exercising your right to make a claim is very low.
How much does title insurance cost?
Title insurance is a one-time premium paid at closing directly related to the value of your home. The cost today is around $3.65 to $3.85 per $1,000 in value. This means that insuring a $250,000 home would cost a $912. The biggest variable in the cost of title insurance is the state in which you are buying a home. Keep these costs in mind, as you’ll have to purchase new title insurance each time you refinance your mortgage as well.
While the market for title insurance is not as variable as other insurance product, it’s still a good idea to compare prices when shopping for title insurance. Each company’s loss experience, expenses, and rates will differ. Some title insurance companies offer discounts to first-time homebuyers, senior citizens and members of certain professions, such as teachers, police officers and firefighters.
As mentioned above, title companies may also offer a discount when you buy both a lender’s policy and an owner’s policy concurrently from the same company, so make sure to ask.
If you do decide to shop around for a title insurance policy, don't focus solely on the cost. You also want to make sure you're getting decent coverage. In general, you should look for a policy that doesn't have a lot of exclusions. An exclusion is basically a way for the insurer to get out of covering your losses. The more exclusions, the greater the chance you won't be covered.
The fee for title insurance is usually included in your itemization of closing costs from your lender, and it is a one-time fee. If a problem should occur at a later date, the terms of the policy define covered and excluded losses. The policy takes effect on the issue date and covers defects that arise prior to your ownership. By law, your lender must deliver your policy to you within a reasonable time after it is issued.
You pay when the policy is issued. It insures you for as long as you own the property. This protection is limited to the face amount of the policy, which is usually the market value of the property when you buy it. It does not cover increases in the value of your property. If you want to cover the increased value of your property, you may buy additional coverage through your title insurer.
Before You Buy Title Insurance
You’re ready to start shopping for title insurance. Just make sure to check these items before you purchase:
- Make sure the face amount of the title policy is correct.
- Check to see that the effective date on the policy matches the actual closing date of the escrow.
- Verify that the policy describes all of the property and all of the interests being acquired.
- Read your policy. Know exactly what is covered and what is not. If you are unsure, ask questions.
- Make sure you keep your policy in a safe, handy place.
Purchasing owner's title insurance will protect you against potential problems and pay for any legal fees involved in defending a claim. It’s a small price to pay for the peace of mind it brings. While it might seem like just another fee, title insurance is actually a good deal because once you pay your fee, it will continue to provide protection for as long as you or your heirs own the property. Those who decline title insurance essentially are betting that the risk of a title defect is minimal and not worth the premium. That’s a risky bet, one you especially don’t want to make with your home on the line.