What Is Title Insurance and Do You Need It?

Transferring homeownership can be a messy business — but title insurance can protect borrowers and mortgage lenders from any mistakes that happened during previous sales. The policy can shield you from headaches like public records errors, fraudulent deeds or the emergence of unknown heirs to the property. It also covers the research a title officer completes to root out these title defects before a home sale. If discovered later, these issues can limit your ability to use and sell a property, or even threaten your ownership status.

Understanding the different types of title insurance, how much they cost and which are required can help you make the best choice when it’s your turn to buy or refinance a house.

Title insurance: Definition

The law allows certain events in a house’s history — like liens, judgements or errors — to remain attached to the property’s title, even after it’s changed hands. Title insurance protects a homeowner or mortgage lender from financial fallout related to a property’s history.

Common title defects include:

A large part of title insurance is proactive, rather than just reactive: Title insurance usually includes a title search, which looks back at the chain of ownership to make sure there aren’t unresolved issues. However, if this search misses a problem that crops up later, the title insurance should cover the costs of addressing it.

What is a title?

“Title” is the legal term for ownership. As such, title to a house isn’t a document, it’s your legal right to own and occupy the property, as well as sell or give it away. Legal documents like deeds define how title is held and allow the transfer of ownership.

Types of title insurance

Lender’s title insurance

 Usually required

Almost all mortgage lenders require that you buy a lender’s title insurance policy to cover your loan amount. It’s important to understand that this coverage is only for the mortgage lender. The coverage shrinks as you pay off your mortgage because your lender’s risk also decreases. Once the loan is paid off, the insurance policy ends.

Who pays for lender’s title insurance?

Mortgage lenders typically require the buyer to pay for title insurance that covers the money they’ve loaned to that buyer. This is a one-time fee, rather than an ongoing premium.

Owner’s title insurance

 Always optional

An owner’s title insurance policy covers your home’s purchase price. It’s optional, but it’s a good idea to have one in case title claims pop up after you purchase the home. In a worst-case scenario, a title defect could not only force you to pay expensive lawyer fees and other court costs, but also strip you of ownership.

If you have an owner’s title insurance policy, though, you would at least be reimbursed for the full dollar amount you paid for the home. In many cases, your legal fees will also be covered. In addition, it’s common for an owner’s policy to cover your heirs.

Who pays for owner’s title insurance?

It’s customary in many states for the home seller to pay for title insurance that covers the buyer. However, if the seller doesn’t agree to cover the premium, a buyer can purchase the policy as part of their closing costs. As with all types of title insurance, it’s a one-time fee.

What to consider when deciding on title insurance

How does a title insurance policy work?

Unlike many insurance policies that come with monthly premiums, title insurance is a one-time purchase. It typically lasts as long as the policyholder has a financial interest in the home.

Whether you’re buying a new home or refinancing your mortgage, the title insurance process typically involves these elements:

1. A title order. The lender, attorney or escrow officer creates a title order and reviews public records related to the home.
2. A title search. The title company will search large databases to research how many times the home has changed hands, as well as whether:
   • There are any liens or unpaid tax judgments against the property
   • Ownership was transferred legally and properly
3. A title report. Once the research is completed, the title company produces a title commitment or preliminary title report. The report covers:
   • Problems that must be resolved before title insurance can be issued. This could include removing tax liens, resolving deeds of trusts from previous owners, judgments and corrections that need to be made.
   • Necessary action items related to your circumstances. For instance, you may need to provide a power of attorney for someone signing on your behalf or record a death certificate if the homeowner died recently.
   • Items that won’t be insured by the title company. These vary from policy to policy, but may include easements, mineral reservations and covenants, conditions and restrictions (CC&Rs), which are created by the original landowner and dictate how land can be used.
4. Closing. As you proceed to the closing table, you’ll see your title insurance premium listed on your loan estimate and closing disclosure. If the amount listed there doesn’t match the quoted amount from your title company, don’t panic. It’s common for these fees to be listed differently on different forms — however, they should add up to the same amount.

  If you have questions about your closing costs, reach out to your mortgage loan officer or escrow officer.

What does title insurance cover?

Once the ink is dry on your home purchase, your title insurance company stands by ready to represent you if title issues arise in the future. The title company will typically cover your home’s purchase price or loan amount, in addition to handling legal costs or damages related to title problems like:

• Forged ownership transfers
• Errors in recorded or filed documents
• Easements or liens that weren’t reported properly or at all
• Issues with the boundaries of your home and a neighbor’s home

What does title insurance not cover?

Unlike with homeowners insurance, you aren’t protected against things that happen in the future. This means that if you don’t pay taxes, don’t pay a contractor for work they’ve completed on your home or violate local zoning and building laws, you won’t be protected against any legal consequences.

How much is title insurance?

You’ll typically spend about 0.50% of the purchase price on title insurance, though your costs will depend on the type of insurance you need, the title company you choose and where you live. At today’s median home price of $412,300, you’re looking at around $2,062 for title insurance.

Title company fees and insurance premiums may be itemized or lumped together into one quote, and may include:

How to shop for your title insurance

When you receive a loan estimate from a mortgage lender, you’ll notice that title insurance costs are included in the “services you can shop for” section of Page 2. Follow these tips to get the lowest title insurance rates and fees:

• Haggle even if you can’t choose the title company. If the seller picks the title company, you can still send them an estimate from another company if the fees look higher than you were hoping to pay.
• Ask about discounts for refinance title fees. You’ll need a new lender’s title insurance policy if you refinance your mortgage. Request a “reissue rate” if it’s the same title company from your home purchase — they may even knock off some of the normal title fees to keep your business.
• Ask for a discount if you’re buying both types of policies. If you want the extra protection of a lender’s and owner’s policy, ask the title company if they can cut you a deal for buying both policies.

Do I need title insurance?

Ultimately, you’ll need title insurance if you’re financing your home purchase through a mortgage lender.

As for whether you need the optional title insurance that covers you, the homeowner, that decision is one only you can make. Carefully weigh the cost of insurance against the risks you could face without the protection it provides.