What is Title Insurance and How Does it Protect the Homebuyer?
Personal Finance Writer
Lauren Hargrave is a writer from San Diego who focuses on technology, finance, and healthcare. She worked in finance for seven years before pivoting to a career in writing, and now, instead of putting numbers into spreadsheets, she writes about them instead.
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While going through the home buying process, you may notice there are a lot of closing fees and required reports. You might find yourself asking, “Is this all really necessary?”
It’s true that some reports, like surveys and property inspection reports, only apply to certain situations or can be waived at the homebuyer’s request. But there are others, like a title report and the accompanying title insurance policy, that are required if you plan to obtain a mortgage loan to purchase the property. Additionally, they can give you peace of mind because they protect your legal ownership rights and your lender’s interest in the property.
In this post, we’ll do a deep dive into title insurance, including:
- Why title insurance is necessary
- Who pays for it
- How much it costs
- Why you need title insurance coverage and why it is a good idea
- How to get a title insurance policy.
Let’s dig in.
What is Title Insurance?
Title insurance is an insurance policy issued by a title insurance company. Title insurance protects the homebuyer and their lender from losses that could occur on a real estate transaction should someone legally challenge the home buyer's right to own the property.
Prior to issuing a title insurance policy, the Title company (as they are often referred to) will run what’s called a “title report.” That means they search public records or title plants (which are databases of property records) to make sure the person who is selling you the home has legal ownership of the property, and that after closing, there won’t be any other claims to the home that could affect your homeownership.
The title search will look for the following information:
- Divorce decrees
- Court judgements
- Tax records
- Bail bonds
- Survey maps
Types of Title Insurance
There are two types of title insurance policies: homeowner title insurance policies and lender title insurance policies.
Homeowner Title Insurance Policies
The homeowner title insurance policy protects the homeowner’s interest in the property and should insure up to the amount of the purchase price.
Lender Title Insurance Policies
The lender’s policy protects the lender’s interest in the home and should insure up to the loan amount.
Types of Policies
There are also two levels of coverage to title insurance: standard and extended.
Standard Title Policy
A standard title insurance policy insures against defects of title – in other words, issues with the title – that are discoverable through public records. That means instances of recorded liens, unpaid taxes or assessments, and defects due to instances like ownership or property survey disputes. It also covers a limited number of risks not discoverable through public records.
Extended Title Policy
An extended title insurance policy insures everything that a standard title insurance policy does, with the addition of certain types of liens, encumbrances, easements, encroachments, and conflicts in boundary lines that aren’t present in public records.
In addition to the base title insurance policy, you can add: guarantees against environmental protection liens; enforcement of covenants, conditions and restrictions (CCRs); damage due to water and mineral development; accuracy of boundaries; and other potential risks. You can also add people or entities to the title insurance policy, for example, a living trust.
What Does Title Insurance Cover?
An owner’s title insurance policy is meant to protect you, the homeowner, against financial losses you may experience if someone comes along after you’ve purchased the property and files a legal claim against your ownership. If this happens, and the legal challenge is successful, the title insurance company will reimburse you for all of the losses that are covered in your policy document, as well as legal costs.
A lender’s title insurance guarantees loan priority for your mortgage lender. That means if another lender materializes with a lien on the property, and the property goes into foreclosure, the title insurance policy will reimburse your lender for any financial losses they experience as a result of that process.
Make sure you read your title insurance policy terms to see which risks are included and which are excluded from the coverage.
Who Pays for Title Insurance?
Despite the fact that most insurance policies require ongoing premium payments, title insurance only requires a one-time fee when you close escrow on a home purchase, so it’s considered to be part of the closing costs. The party who is responsible for paying the owner’s title insurance policy varies depending on the location and what is customary in that market. In some markets, the homebuyer pays for the title insurance premium, and in others, the seller pays. Sometimes, they split the cost.
Whoever is paying for the title insurance policy gets to choose the company they want to use. It’s illegal for a seller or mortgage broker to require you to use a specific insurance company.
How Much is Title Insurance?
The average title insurance policy costs about $1,000. However title insurance companies’ rates will differ based on location, the company’s experience with loss, the services they offer, the insured amount, the risks they cover, etc.
There are state governments like Texas that set title insurance rates for the entire state and other states like California that allow rates to vary; home buyers in that state with varying rates may benefit from shopping around. The title companies are required to file their rates with their state insurance commissioner and are prohibited from offering you rates below what they’ve filed.
That being said, the following are discounts that could apply to your title insurance policy premium, depending on your situation:
- First-time homebuyer discount
- A short-term policy discount (if your home was sold within the last 5 years)
- A concurrent rate if you’re acquiring the owner’s title insurance policy and lender’s title insurance policy at the same time
- A “bulk rate” for homes being purchased in a new subdivision
- A refinancing discount, also called a “re-issue rate.”
If the previous owner can provide a copy of their owner’s title insurance policy, you may be able to renew the one they have at a discount. But keep in mind that you will have to renew it as the new owner since the previous owner’s policy only protects them from title defects.
Always ask your title representative if there are any premium discounts available, and make sure to shop around to find the best rates.
How Do You Get Title Insurance?
You can purchase title insurance from a title insurance company. This could be the same company that you use for escrow services (many companies offer both services), but it doesn't have to be. You can ask your mortgage broker or mortgage lender for recommendations of companies they have liked working with in the past.
One thing you should be aware of is the following: It is illegal for mortgage brokers, homebuilders, or lenders to receive a rebate or commission from steering your business to a particular company. If you suspect this is happening, you can report it to your state’s department of insurance.
Is Title Insurance Required When You Buy a Home?
If you’ve secured a mortgage to purchase a home, then your lender will require you to purchase a lender’s title insurance policy to protect their interest. An owner’s title insurance policy isn’t required in order to close escrow on a home purchase, but it might be advisable to buy one to protect yourself in the case of title issues. There can still be problems with a property’s title even if you’re buying a home that’s new construction.
What Can Happen if You Don’t Get Title Insurance?
Title insurance is there to protect the homeowner and lender from unforeseen issues with the title on a property. Even if you’re purchasing a new development, or refinancing a home that has been in your family for generations, there can still be a title problem. As stated above, the issues can be old liens that haven’t been satisfied, unknown heirs, divorces that weren’t actually finalized – there are many reasons a third party might have a claim to the property that you legally bought.
If you don’t have title insurance, fighting a title claim could result in a legal battle costing thousands of dollars. If you do have a title insurance policy, the title company will defend your ownership rights and cover any legal costs or other losses you experience as a result of this claim (as long as those losses and expenses are covered under your policy).
Buying a home is an exciting time and you want to be able to move into your new place focused on the future, not worrying about an unknown issue from the past. Knowing that you’re protected from losses in the case a title issue materializes can go a long way toward easing any worries you might have. If you have more questions about how title insurance can affect your real estate purchase, reach out to a mortgage advisor today.