What Is Title Insurance and Why Do You Need It?
Title insurance may seem like just another expense to cover when you close on a home, but this coverage may be more important than you think. Like any other type of insurance coverage, title insurance only seems unnecessary until you actually need it.
If someone sues you and says they have a claim against your home, your title insurance policy steps in to protect you from financial damages. Title insurance can also protect you from the ramifications of past liens, unpaid taxes or contractors who say they were never paid for work on the home.
In that sense, title insurance is like health insurance, It protects you when something goes wrong
While you get health insurance to protect yourself in the event of future health issues, title insurance is about protecting you from the past. Oftentimes, a property is transferred incorrectly and other people’s interest in the property may not be extinguished.
- How title insurance works
- Why is title insurance important?
- How much does title insurance cost?
- How to save on title insurance
How title insurance works
Here’s how title insurance works: After closing the home purchase, you receive a document called a deed. This document shows that the seller transferred legal ownership or “title” of their home to you. Title insurance protects this transaction by building a financial barrier between the new owner of the home (you) and people who may come out of the woodwork to say they have an interest in the property.
There are two types of title insurance involved in a home purchase — owner’s title insurance and lender’s title insurance. While owner’s title insurance protects the property owner from past claims, lender’s title insurance protects the lender from financial losses on their end.
Lender’s title insurance protects their security interest in the property. If a lender lends you money to buy a home, their title insurance protects their investment from similar claims as owner’s title insurance. It protects the lender if someone else is claiming an interest in the property. Without it, a lender could lose its money if someone sued for rights to the property for which it issued a loan.
Why is title insurance important?
Most lenders require you to a buy a lender’s title insurance policy and an owner’s title insurance policy to take out a mortgage.
This coverage is crucial because it protects against the unknown and because it protects your property rights.
Purchasing an owner’s title insurance policy is the best way to protect your interests. But, it’s not just about you, because title insurance also protects your trustees, inheritors, and beneficiaries.
As an example, imagine this scenario where title insurance could come into play:
Let’s say you are married but separated from your spouse 30 years ago. Your spouse left and started a new life but you never legally divorced.
At some point, you decide to sell the home you’ve lived in for decades to another family member. But, since your spouse has moved on, they never sign the deed.
Unfortunately, they could still have an interest in the property because it was their homestead and you remained legally married before and after the sale. If your spouse comes back decades later, they could claim an interest in the property. At that point, title insurance purchased by the new owners of the property would deal with any litigation and costs that rise out of fighting or satisfying his claim.
The same can be said for other potential interests in a property, such as unpaid taxes, unpaid liens or contractors who claim they were never paid for their work on the home. Sometimes undiscoverable defects can come up after the title search. Title issues may include forgery, fraud or clerical errors. Also, pending legal action against the property can affect you whether you know about it or not.
Another example is when an unforeseeable discrepancy in the property or fence line can cause confusion in ownership rights.
In addition to the other title issues we’ve mentioned, messy foreclosures from the last decade have also created too many title-related issues to count. One good example is the case of U.S. Bank v. Ibanez in Massachusetts. During this Supreme Judicial Court case, the court system informed a foreclosing lender and the purchaser of the foreclosed property that an error had invalidated the sale of the home as well as the initial foreclosure. From there, the court system was legally required to return the home to the owner who had defaulted on the home.
Because many distressed-property sales are mortgage-free cash transactions, experts noted that foreclosures are ripe for title problems. Remember that cash transactions don’t require title insurance. This lack of coverage often leaves buyers holding the bag when due diligence wasn’t conducted to clear the title of their new home.
Owner’s and lender’s title insurance: How do they compare?
|Comparing Title Insurance|
|Lender’s title insurance||Owner’s title insurance|
|Who does it protect?||Lender’s title insurance protects the lender from financial losses caused by claims against the property they offer a mortgage for.||Owner’s title insurance protects the property owner from claims against the title of their home.|
|Who pays for this coverage?||The borrower taking out a mortgage typically covers the cost of lender’s title insurance, but the seller of the home may also pay for this coverage.||The borrower taking out a mortgage typically covers the cost of owner’s title insurance, but the seller of the home may also pay for this coverage.|
|What does it protect against?||Lender’s title insurance protects from claims against the title of a home, whether they’re for past liens, past ownership or unpaid taxes.||Owner’s title insurance protects for claims against the title of a home, whether they’re for past liens, past ownership, or unpaid taxes.|
How much does title insurance cost?
Whether you believe title insurance is important or not, you’ll need to get this important coverage if you’re taking out a mortgage to purchase a home. But, who pays? And, how much does this coverage cost? These details and others can vary slightly depending on where you live and on your home purchase.
In the state of Maryland, the costs of owner’s title insurance works out to an average of .03% – 0.5% of the purchase price of your home. So, if you purchase a property for $300,000, you would pay around $1,500 for an owner’s title insurance policy. However, the price of title insurance depends on the purchase price, loan amount, type of transaction, and type of property. Since rates vary depending on where you live, there is no standard average nationwide.
However, the fact that title insurance is a highly regulated industry means that some states take extra steps to regulate costs. In Florida, title insurance is fixed by the state at a rate of $5.75 per $1,000 in property value on the first $100,000. For any amount over that, it’s $5 per $1,000.
Each state’s department of insurance offers information on pricing for title insurance, so make sure to check your state’s policies. If you live in a state where prices aren’t fixed, this means you can shop around for title insurance to find a better deal.
Lender’s title insurance can be considerably less expensive than owner’s title insurance. But, if lender’s title insurance is issued with no owner’s policy (for instance, on a refinance), it’s calculated pursuant to the same formula used for owner’s insurance based on the loan amount. Of course, the price for lender’s title insurance can also vary slightly depending on where you live.
Either way, it’s important to note that title insurance isn’t an ongoing expense. You pay both owner’s and lender’s title insurance upfront at closing to protect all parties involved in the sale from day one.
While the homebuyer typically pays for title insurance, some buyers negotiate to have the seller pay for this coverage.
Typically, how this works is that whoever picks the title company pays for the title insurance. Many times the seller will pick the title company and pay for the buyer’s title insurance as a credit at closing.
How to save on title insurance
While some states regulate title insurance pricing, you may still be able to save. Here are some money-saving strategies to consider as you move toward closing on your home:
- Shop around: If your state doesn’t regulate the cost of title insurance, you may be able to save money by comparing title insurance prices from more than one title company. Make sure to read title company reviews or ask your real estate agent for a recommendation if you need help narrowing down your list of companies to consider.
- Ask the seller to pay for title insurance: As we mentioned already, it may be possible to get the seller of your home to pay for owner’s and lender’s title insurance as a credit at closing. You’ll want to negotiate this benefit when you negotiate the other details of the transaction on your home.
- Bundle policies: Lender’s title insurance is a lot more affordable when you buy both lender’s title insurance and owner’s title insurance at once. It’s referred to as the simultaneous issue rate.
Title insurance may seem inconsequential, but you may quickly change your tune if you actually need it one day. If you’re purchasing a home, your best bet is making sure you have quality title insurance to protect your interests in the property you buy.
Especially for older homes, it’s important to shield your assets against whatever may have happened with your property decades before you owned it. Like other types of insurance, title insurance was designed to protect against the unknown. Because, like it or not, what you don’t know can hurt you.