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When you buy a house, you’ll pay a number of closing costs in addition to the home’s price. These could include things like attorney and closing fees, homeowner’s insurance, initial property tax payments, and more. If you take out a loan, one of the closing costs will likely be something called title insurance.
What is title insurance? In this piece, we’ll answer that question, explain why you need it, and discuss the different types of title insurance before helping you navigate how to buy it.
What is a title?
A title represents the legal rights surrounding the ownership of a piece of property. Unlike a car title, a house title isn’t a physical document. Rather, it’s a legal conception of a “bundle of rights” that a property owner has. It means you have the right to possess the property; use the property; enjoy it how you wish; limit who enters the property; as well as sell, rent, or transfer ownership as you see fit.
A title may be limited by the law, easements or liens on the property, or homeowners association (HOA) loans. They may sound straightforward, but titles may become subjects of contention during sales, or even after you’ve already closed on a property. That’s one reason why title insurance is so important.
What is title insurance?
Title insurance protects both lenders and homebuyers from financial loss if somebody contests the title to a property or other issues with the title. A clear title is essential for any real estate transaction.
Before closing, a buyer or their lender should enlist a title search company to check public records for claims or liens against the property. Title companies should ensure a clean title before a buyer continues on with a purchase.
That said, even if a title search verifies a clean title, it’s not an infallible process. There are a number of issues that could impact the title. Common claims filed against a title include back taxes, liens from previous lenders, and conflicting wills. Title defects could also include issues like erroneous surveys, unresolved building code violations, or outstanding debts to contractors.
While traditional insurance protects against the future, title insurance protects against claims from the past that title searches may miss. As such, a basic title insurance policy typically covers the following hazards:
- Ownership by another party
- Incorrect signatures on documents, as well as forgery and fraud
- Flawed records
- Covenants that reduce value or enjoyment, like unrecorded easements
- Property survey errors
- Boundary disputes
- Building code violations by a previous owner
- Conflicting wills
- Claims by an ex-spouse who didn’t authorize the sale
- Claims related to a forged power of attorney
- Liens from contractors, taxing entities or previous lenders
- A former owner’s unpaid child support
Title insurance covers any claim against a title that comes after closing. Real estate is a dicey business, especially when it comes to old homes that have passed through many owners. It’s possible the current owner doesn’t know about existing claims or encumbrances. Likewise, an overlooked heir to a property may have rights without knowing it.
Types of title insurance
There are two types of title insurance: lender’s title insurance and owner’s title insurance.
If you’re taking out a loan to buy a house, nearly all lenders require you to also purchase a lender’s title insurance policy. This protects the lender in the event that you’re not able to legally transfer the title of ownership rights in the future. A lender’s title insurance policy only protects the lender against loss and is only issued after the completion of a title search.
Since you get a lender’s title insurance policy only after a completed title search, there’s some assurance that the title won’t become a problem in the future. But, again, title searches aren’t infallible. If it seems a little unfair that you’re paying for a lender’s right to recoup any losses on a loan they approved, well, you’re right. It is!
You’re still at risk of financial loss if a title dispute arises. As such, you can secure the additional protection of an owner’s title insurance policy. This optional purchase protects a buyer against defects in the title. It’s an extra expense but, remember, the lender’s policy you’re already paying for won’t do anything for you.
Do you need title insurance?
Do you need title insurance? If you haven’t deduced yet that, yes, you need title insurance, let’s state it plainly: You need title insurance.
If you’re buying a home with a loan, lender’s title insurance is likely mandatory. If you’re buying with cash, you should still get an optional owner’s title insurance policy. Having no title insurance exposes you to significant risk down the road. Title searches are good but they are not perfect. If you find out years after buying that a previous owner owed thousands of dollars in property taxes, you’re liable to pay them in addition to penalties. If someone emerges with a legitimate claim to a property promised to them by the previous owners, you may be in trouble without title insurance.
In both these instances, failing to pay the taxes or win a challenge in court will result in losing the property for nothing.
Even lender’s insurance — although far more beneficial for the lender — offers some protection for buyers. Lender’s title insurance covers banks and mortgage lenders from unrecorded liens, unrecorded access rights, and other title defects. If a borrower defaults on the loan because of a title defect, the insurance company reimburses the lender for the full amount of the mortgage rather than the buyer.
Owner’s title insurance, like most insurance, might feel like a waste of money if you never need it. But that’s what insurance is, isn’t it? It’s invaluable help in a worst-case scenario. An owner’s title insurance policy protects you against losing equity or even losing your right to live in a home due to a title defect. Even if a title dispute is unlikely, you’ll be happy you have title insurance when the alternative is potentially ruinous.
How to purchase title insurance
Ask your real estate agent or real estate attorney about purchasing owner’s title insurance during the closing process. After completing the property purchase agreement, an escrow or closing agent can initiate the insurance process.
There are four major U.S. title insurance underwriters: Fidelity National Financial, First American Title Insurance Company, Old Republic National Title Insurance Company, and Stewart Title Guaranty Company. You can also shop for smaller regional title insurance companies.
An owner’s title insurance policy typically costs between $500 and $3,500 depending on the state you live in, your insurance provider, and your home’s purchase price. Note, that’s a one-time payment that covers the duration of your stay in the home.
Sometimes, insurance underwriters require packaging a lender’s policy and owner’s policy together to ensure everyone is protected. In those instances, both lender and homebuyer purchase title insurance together. In these instances, both policies together usually cost about 0.5% to 1.0% of the home’s purchase price according to the American Land Title Association (ALTA). In some instances, that may save you money on title insurance.
If you’re on your own shopping for a title insurance policy, ask for recommendations from the seller, your real estate agent, and your lender. Your lender’s recommendation may be the best considering their financial interests in the property align with yours, but all three sources could have some incentive for recommending individual title companies. Don’t make a decision without doing your own research.
To find a title insurance company, explore options from each of the four major title insurers. Old Republic, Fidelity National, First American Title, and Stewart all offer rate calculators online. If you don’t like what you see there, search the ALTA Registry for smaller companies in your state and contact them individually for estimates.
Most forms of insurance protect you from future events. Title insurance protects you from events overlooked in the past. We’ve all heard about how the past can come back to bite you, right? When it comes to real estate, you do not want to get bitten with a title claim or defect. Purchasing title insurance for a one-time fee will give you the protection you need to avoid incurring previous owners’ debts or risk losing the house for nothing.