What is title insurance?

Title insurance protects you and your lender against expensive litigation if your home has faulty or defective ownership records.

Pat Howard 1600

Pat Howard

Published January 7, 2019

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When you take out a mortgage on a home, your lender will typically require that you get title insurance for your home and that it’s paid for as part of your closing costs. Title insurance protects you and your lender from financial loss due to legal expenses in the event that an issue arises with the home’s title, which is a set of ownership documents for the home.

Title insurance insures you against events and errors that occurred before you owned the home, like improper or forged title documentation or unpaid debt by past property owners.

Title insurance is made up of two types of policies: a policy that protects your lender, or a lender’s title policy, and a policy for you the homeowner, or an owner’s title policy. Although your mortgage lender only requires that you buy a policy on their behalf, we strongly suggest you buy an owner’s policy to safeguard your investment against unforeseen issues with your title.

Read on to learn more:

How does a title work?

A title is a collection of documents which serve as evidence that you have the right to own your home. Your title generally consists of a number of reports and records which detail former owners of the property (known as the property abstract or the chain of title).

Titles also list any potential encumbrances that apply to your home, like easements for hunters to be able to pass through your yard to access their hunting property, as well as any liens (both resolved and unresolved) that may have been placed on the home against past property owners. This collection of records is typically filed in city or county archives, and the information is readily available to the public.

Before you become the official possessor of the title and home, you’ll need a licensed title professional to look over your title and make sure there are no defects or inconsistencies in the title, including existing liens attached to your property that could come back to haunt you down the road. If the title records come back clean, then great, you’re one step closer to closing on your house, but you’ll still need title insurance. We’ll go over why exactly in the next section.

What is title insurance?

Title insurance is the peace of mind that you’ll be absolved from every and all legal dispute tied to your property that preceded your ownership of the home.

Say, for example, that the owner of the house prior to your move-in passed away suddenly with a number of liens against the property, or maybe the prior owner hid the lidens maliciously to sell the house quicker. These liens could be unpaid state taxes, an unpaid water bill to the city, unpaid services like home repairs and renovations to a contractor, and a host of other shady debt. Unfortunately, the creditors don’t care that you had nothing to do with the liens — they may still attempt to come after you for the unpaid debt attached to your property.

That’s where title insurance comes in to play, as it pays for any legal expenses related to unresolved debt or property disputes.

Before you buy title insurance, you’ll pay a title company to conduct a title search, and when they find it, they’ll look over your title to make sure everything looks good. If your title has any errors or inconsistencies, or if there’s any liens against the home, it’s your title professional’s job to “perfect” the title.

But the title professionals don’t always catch every defect in a title, and that’s why you need title insurance, which covers you in instances of:

  • Forgery or fraud
  • Undisclosed heirs to the property
  • Inconsistent wills
  • Unsettled liens that precede your ownership of the home
  • Defective paperwork (not properly executed or notarized)
  • Certain information not on record that should be
  • Right of access
  • Transfers are determined to be illegitimate

Like homeowners insurance, auto insurance, and a host of other insurances, title insurance companies allow you to expand your coverage through endorsements to your policy, which you can typically add for a small amount more. These endorsements include:

  • Right of vehicular and pedestrian access
  • Building ordinance violations
  • Border line disputes
  • Subdivision restrictions
  • Private restrictions violations
  • Unpaid taxes
  • Zoning violations

But be sure to read your policy closely to understand what it does and doesn’t cover, as your coverage may vary by state and title insurance company.

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Lender’s title insurance

If you take out a mortgage on a home, your lender will require that you buy a lender’s title policy to protect their interest in the property.

Ultimately, your lender wants the assurance that they’re protected against any outstanding possible liens against your property, and lender’s insurance may compensate them if a lawsuit is brought their way.

Keep in mind that lender’s title insurance only protects the lender and claims that specifically affect the lender’s loan. If someone sues with a claim against your home, you’ll be the first person responsible since you’re on the title, and you’ll need your own personal owner’s title policy to protect your investment.

Owner’s title insurance

Although it may not be required like a lender’s policy, owner’s title insurance is arguably more crucial to you and your assets, and is a must-have for almost anyone who owns a home.

Owner’s title insurance essentially insures your ownership rights in the home. If any situation arises where the ghosts of your home’s past come back to haunt you — maybe the prior owner’s offspring claim to be heirs to the property and file a lawsuit against you, or maybe the property is liened by the U.S. government because the prior owner owed hundreds of thousands of dollars in income taxes — your owner’s title insurance will cover any covered dispute or legal trouble that you didn’t cause.

Exactly who pays for owner's title insurance varies from state to state — sometimes the owner pays for it, sometimes the seller pays for it, or in some cases you may be able to make a deal with the seller to split the insurance costs with you.

Although claims against a title are very rare, the costs of litigating such a claim can be extremely expensive, so you don’t want to be the one-in-a-million case that is met with a lawsuit that eventually bankrupts you.

How much is title insurance

Title insurance, both lender’s and owner’s, is a one-time payment rolled into your closing costs. Your lender’s policy lasts until you repay your entire mortgage, and your owner’s policy lasts for as long as you own the home.

While title insurance costs can vary from state to state, the amount you pay typically depends on how much you took out for your home loan.

And while the cost of both policies typically ranges from anywhere from $1,000 to $4,000, according to Courthouse Direct, a public records and title research website, there are some cases where you won’t have to pay for anything, as you may be able to negotiate with the home seller to pay for the policies.

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