You’re all settled into your dream home — the one you saved up years to afford. You’ve unpacked every last moving box, arranged the furniture, and made the first payment on your mortgage. Life is good.
Then, one day, you hear a knock at the door. The person standing there hands you an official-looking document and tells you the now-grown child of a previous owner is suing you. They believe the property belongs to them, and they have the previous owner’s will to prove it.
You know you need to hire a lawyer. But you’re all tapped out after paying tens of thousands of dollars for the down payment. You’re in a serious bind — one that could get worse if the person suing you prevails. But if you had home title insurance, you probably wouldn’t have to pay out of pocket to defend yourself.
What Is Home Title Insurance?
Home title insurance, or simply title insurance, is a special but common type of real estate insurance that protects your financial interest in a specific piece of property.
You can buy title insurance on your primary residence, second home, or any investment property you buy directly. You don’t need title insurance to invest in real estate indirectly, such as through publicly traded real estate investment trusts or real estate crowdfunding.
Most forms of insurance provide financial protection against future losses. For example, homeowners insurance protects against costs related to damage to or theft from your home. Title insurance protects against future losses too, but it covers out-of-pocket expenses associated with future ownership disputes.
Title insurance also covers a lot of upfront work that happens before you even own your home. After you make an offer on a new property but before you close, your title insurance premium covers the cost of investigating the title. It also covers the cost of fixing any title issues, such as old liens or ownership disputes, before they cause greater financial harm.
What Does Home Title Insurance Cover?
Title insurance policies typically have three functions:
- Cover the cost of investigating the chain of title, the official ownership records of the property in question
- Cover the expense of fixing any problems discovered during this investigation
- Pay future legal expenses for any action against or attempts to collect money from the current owner resulting from any undiscovered issues
Title Search
Though title insurance policies vary from state to state and provider to provider, they always cover the cost of conducting a title search. A title search is a thorough examination of relevant public records to determine whether any problems exist with the title. These records are typically held with the city or county where the property is located.
Ideally, a title search looks at the entire history of a property stretching back to its original platting or subdivision. That’s generally done by scrutinizing the property’s abstract, a document containing the complete chain of ownership and historical liens.
A comprehensive title search doesn’t stop there. Since abstracts can be incomplete or contain erroneous information, title searchers rely on other sources, such as local tax records, previous owners’ wills, and past court judgments.
Curing or Resolving Problems
Title insurance policies also cover the cost of resolving or “curing” most title problems uncovered during the search, which insurance professionals call “defects.” Common title defects include:
- Liens for unpaid property taxes, known as tax liens
- Construction liens — also known as mechanics’ liens — for unpaid construction, renovation, or repair bills
- Liens for other unpaid debts that used the home as collateral
- Court judgments, such as a post-divorce judgment awarding part of the property to a former spouse
Old liens or judgments don’t necessarily jeopardize the sale. But in rare cases, the title search does uncover egregious problems with the title that make it difficult to proceed.
For instance, the title searcher might discover the seller doesn’t really own the property and thus doesn’t have the right to sell it or that a previous deed transferring the property was forged and the true owner can’t be located.
In such cases, the lender could refuse to issue a mortgage on the property and force the buyer to walk away.
Legal Costs & Loss Compensation
Finally, title insurance policies cover future costs arising from title disputes. For example, if you have a valid title insurance policy, you won’t have to pay out of pocket when a building contractor stiffed by the previous owner sues you.
In the rare event a court rules the most recent transfer of the property was invalid, your title insurance policy compensates you for any loss of equity in the property. That might occur if it’s discovered a previous owner deeded the property to a third party in a previously undiscovered will, for example.
A title insurance policy’s coverage limit is usually equal to the property’s assessed value when the policy is issued. The lender’s appraisal sets that value.
Types of Title Insurance
Title insurance comes in two basic forms: lender policies and buyer policies.
As the buyer, you’re generally responsible for paying the full cost of both policies. That expense is one of many closing costs. However, in a buyer’s market, you may be able to work out a cost-sharing arrangement with the seller or even convince them to cover the entire cost.
Either way, each policy type works slightly differently.
Owner’s Title Policy
Also known as an owner’s title policy, a buyer’s policy protects your ownership interest as the buyer and future property owner. That interest increases with time, which means your financial liability for any title issues also increases with time.
Owner’s title insurance is not mandatory. However, the cost is a fairly small share of total closing costs, and going without it could have serious financial consequences, so it’s worth the investment.
Your owner’s policy remains in force for as long as you own the property, even after you pay off your mortgage.
Lender’s Title Policy
Also known as loan policies, lender policies protect the mortgage lender’s interest in the property, which usually decreases over time. For this reason, they tend to cost less than buyer’s policies.
Lender policies remain in force for the entire life of the loan or until you refinance the loan, at which point the lender obtains a new policy.
How Much Does Home Title Insurance Cost?
Like other types of insurance, title insurance policies wrap their fees into a single charge called a premium. Unlike most other types of insurance, title insurance premiums don’t recur every month or year. You pay them all at once during closing.
Some of the factors that affect title insurance premiums include:
- The value of the property — typically, more expensive properties have higher title insurance costs
- The amount of work necessary to maintain accurate, up-to-date information on the covered and adjacent properties
- The amount of work necessary for the title search and examination
- The amount of work required to cure any defects or adverse interests uncovered by the title search
- The expected cost of compensating the insured parties for any title defects
The average title insurance policy carries a one-time premium of about $1,000, which covers all upfront work and ongoing legal and loss coverage. However, premiums vary substantially. They can range from less than 0.5% to more than 1% of the purchase price.
State regulation also plays an important role in title insurance premiums. Some states tightly regulate the industry, severely limiting how title insurers can structure their policies and how much they can charge.
In other jurisdictions, title insurance regulation is lighter, and insurers have more leeway to set rates. For example, Wisconsin allows title insurers to follow a “file-and-use” standard, where they can change rates on the fly as long as they notify the state within a set time frame.
Do You Need Title Insurance Coverage?
You’re not required by law to purchase an owner’s title insurance policy. In that sense, you don’t “need” owner’s title insurance.
But choosing not to buy title insurance for yourself could be a very costly mistake. There’s a reason your lender has title insurance. It has seen far too many examples of title issues causing serious financial hardship for homeowners and doesn’t want any part of them.
Without title insurance, you could be held liable for old liens, fines, and other debts attached to the property. Yes, even if the owner who was supposed to pay them is long gone. As the current owner of record, it falls to you to make the creditor whole.
If you’re not able to pay old debts that come to light, you risk losing the property to foreclosure. That’s most commonly for unpaid property taxes, which can be hefty. If you can’t pay the bill for back property taxes and can’t work out a payment plan, the city or county could seize your property and sell it in a tax foreclosure auction.
How to Choose the Right Home Title Insurance Policy
You’ll receive a title insurance recommendation at some point during the underwriting process. Depending on how real estate transactions work in your state, this recommendation might come from your mortgage lender, title agent, real estate agent, or real estate attorney.
Title insurance costs and policy terms rarely vary much between insurers operating in the same jurisdiction. And purchasing title insurance is just one of many things you must do to close on a mortgage loan, so you might feel tempted to act on this recommendation without a second thought.
But you don’t have to. A federal law known as the Real Estate Settlement Procedures Act prohibits anyone from forcing you to use a particular title insurance company. As a real estate buyer, you always have the option to shop around for an owner’s title insurance policy and choose the provider that best fits your needs. You can’t shop around for a lender policy, though.
Because title insurance is so standardized, the most important factor to consider when shopping for an owner’s policy is price. The first closing estimate you receive from your lender should include a line item stating the estimated total cost of your owner’s policy. That’s your number to beat — you want a cheaper policy.
To find that policy, search online using terms like “owner’s title insurance policy in [your state].” Visit each provider’s website and look for pricing information. If you’re lucky, you’ll find actual prices listed on the site, but don’t be surprised if you don’t. A quick phone call should get you a ballpark estimate.
If you’re buying lender’s insurance and owner’s insurance from the same company, ask about a bundle discount. They won’t necessarily offer one unless you ask. And if the seller bought the home less than 10 years earlier, ask the title company for a reissue rate — basically, an extension of the seller’s current policy.
Once you have several quotes, choose the lowest one. Make sure the policy you end up selecting covers a full title search, defect curing, and future legal expenses.
Final Word
Title insurance doesn’t come cheap. Depending on factors like where the property is located, how much it’s worth, and how many times it has changed hands over the years, your owner’s title insurance policy could cost anywhere from less than 0.5% to more than 1% of the purchase price.
Add in the lender’s title policy, which is typically cheaper but by no means free, and you’re looking at a sizable addition to your closing costs.
But does that mean title insurance is a bad deal? Hardly. It’s a drop in the bucket compared to the total cost of homeownership, and the protection it provides is potentially invaluable. Though title issues are relatively unlikely to arise on any given property, title insurance ensures you’re not financially liable for past debts or legal expenses related to those issues.
And in a worst-case scenario, title insurance could mean the difference between staying in your home and losing it to foreclosure.
When you put it that way, home title insurance sounds like a bargain.
