When you take out a mortgage to buy a home, your lender will typically require that you get title insurance for the property. Title insurance can protect you and the mortgage lender from financial losses due to legal expenses when an issue arises with home’s title, which is a documentation of ownership for any given property or piece of real estate.
Title insurance protects you against any events and errors that occurred before you owned the home, like improper or forged title documentation, unpaid debt by previous property owners, or issues of ownership resulting from conflicting wills, all of which could potentially cloud or blemish the property title.
There are two types of title insurance: an insurance policy that protects your lender, called a lender’s title policy, and a policy that protects the homebuyer or homeowner, called an owner’s title policy. Although your mortgage lender only requires that you buy a policy on their behalf, you should probably get an owner’s policy as well to safeguard your investment against unforeseen issues with the title.
How does title insurance work?
Title insurance coverage can give you the peace of mind that you’ll be absolved from legal disputes tied to your property that precede your ownership of the home. Before you become the official possessor of your new home, a licensed title professional must conduct a title search to make sure there are no defects or inconsistencies that could negatively affect you down the road.
For example, let’s say that the previous owner passed away suddenly with a number of liens against the property resulting from unpaid taxes, an unpaid water bill to the city, or even unpaid HOA fees. Unfortunately, creditors don’t care that you had nothing to do with the liens; they may still come after you for the unpaid debt attached to your property and are legally within their rights to do so.
Another example: soon after moving into the house, you find out that the seller bequeathed the property to their grandchildren in a newly discovered will. You’ll likely face a court battle next. That’s where title insurance comes into play, as it pays for any legal expenses related to unresolved debt and property disputes.
It is the title professional’s job to “perfect” the title by resolving liens and removing clouds when they find errors or issues.
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What does title insurance cover?
The title company can't always catch every defect in a title, and that’s why you need a title policy. Title insurance covers:
Forgery or fraud
Undisclosed heirs to the property
Liens that precede the new homeowner
Defective paperwork, like improper recordings from escrow and closing
Transfers of the deed determined to be illegitimate
As with other types of insurance, the title insurance company will allow you to expand your insurance coverage through policy endorsements — also referred to as riders — which you can typically add for a small price.
Endorsements may include:
Others’ easements on your property, like right of vehicular and pedestrian access
Building ordinance violations
Border line disputes
Private restrictions violations
You’ll know about the terms of the insurance policy in advance; a document called a title commitment will detail what is and isn’t covered, and should be issued to you before closing. Keep in mind that insurance coverage will vary by state and title company.
A refresher on real estate titles
A title, also referred to as a real estate title, is a collection of documents that serve as evidence that you have the right to own your home. Your title generally consists of a number of reports and records — known as the property abstract or the chain of title — which detail former owners of the property.
A real estate title also lists any potential encumbrances — like easements allowing hunters to pass through your yard to access hunting grounds — and liens that may have been imposed on the home against the previous property owners — such as those for unpaid taxes or mortgage payments.
Encumbrances and liens can result in a defect or cloud on the title. This collection of records is typically filed in city or county archives and the information is readily available to the public.
What is lender’s title insurance?
If you take out a mortgage on a home, your lender will require that you buy a lender’s title insurance policy to protect their interest in the property (just like how the lender will also ask you to get homeowners insurance).
This title policy assures the lender that they’re protected against any outstanding liens and issues with property. Also known as a loan policy, lenders title insurance may compensate the mortgage lender if a lawsuit is brought against them.
As the name suggests, lender’s title insurance only protects the lender and title claims that specifically affect the lender’s loan to the homebuyer. If you’re a homeowner and someone sues you with a title claim against your home, you’ll need your own separate policy for similar protections. More on that next.
What is owner’s title insurance?
An owner’s title insurance policy essentially ensures your ownership rights to a property after you buy it. An owner's title insurance policy can be crucial for most homeowners, even though it may not be required like a lender's title policy. If any situation arises where the ghosts of your property's past come back to haunt you — like if the previous owner’s children claim to be heirs to the property and file a lawsuit against you, or the the previous owner did not pay their property taxes — your owner’s title insurance will cover certain disputes and legal trouble that you didn’t cause.
There is greater potential for title claims when you buy a foreclosure home, but even homebuyers of newly constructed homes should consider title insurance, since there may be a sketchy past in regards to who previously owned the land. Additionally, if the builder failed to pay any contractors, a title insurance policy could save you from a mechanic’s lien.
Legal fees to fight a title claim can be expensive and time-consuming, so an insurance policy is an important financial safeguard.
How much is title insurance?
Title insurance, both lender’s and owner’s, is a one-time payment typically rolled into closing costs. There are no monthly insurance premiums. The lender’s title policy lasts the duration of the mortgage, and the owner’s title policy lasts for as long as you own the home.
If you get both policies, title insurance will likely cost you about $1,000, but that varies by state. In some states the cost depends on the size of the mortgage loan, but in others the cost may be regulated or set at a fixed rate, so you won't necessarily be able to get a better premium with a different title insurer (but they may have different coverage). The real estate attorney usually chooses a title insurance company for you, but if you have strong preferences, you can choose a different one.
Buyers typically pay for the lender’s title insurance, but exactly who pays for owner's title insurance can vary. If the seller does not pay for the owner’s title insurance policy, the buyer can try to negotiate and split the title insurance costs or get them included as seller concessions.
Having an experienced real estate agent when you’re buying a house can come in handy here to guide you through the process and tell you what’s typical in your area.