One of the closing costs you’ll encounter when taking out a mortgage is title insurance. Title insurance is typically a one-time cost, and it protects you and your lender from defects in a title to a property.
In this article, you will learn:
- What title insurance is and what it protects
- Who pays for the title insurance policy
- Lender’s title insurance vs. owner’s title insurance
What is title insurance?
Title insurance is a type of indemnity insurance meant to protect homebuyers and lenders from any financial losses or damages arising from defects in the property title. The last thing you’d want to deal with after closing on a house is a defective title.
You may discover, after closing, that the seller doesn’t have a legal claim to the property ownership or that someone else is contesting the seller’s claim. Any issues related to a defective title could be highly damaging.
Do I need title insurance?
To answer that question, let’s first look at how title insurance works and understand the types of title insurance.
Once you decide to purchase title insurance, the title company will conduct a title search on every title ever claimed on the property. A title search involves a thorough examination of all available public records to confirm the legal ownership of the home you’re looking to purchase. If the title search reveals any discrepancies, the title company will try to resolve the issue. Your real estate agent may have to work with the seller agent to handle the problem in some special situations.
There are two types of title insurance – lender’s title insurance and owner’s title insurance. Each type of title insurance offers lenders and homebuyers a different level of protection in a typical real estate transaction.
Lender’s title insurance
A lender’s title insurance protects the lender. Most, if not every, lenders require the borrower to purchase a lender’s title insurance policy to protect the lender against any financial loss caused by a dirty title. The policy covers the lender up to the amount of the mortgage. While you, as the borrower, have to pay for it, a lender’s policy only protects the lender and not you.
Owner’s title insurance
Owner’s title insurance, on the other hand, is optional. An owner’s title insurance protects the homebuyer from any financial loss due to title defects. It is typically paid for by the seller, although the buyer could also purchase the policy independently.
How much does title insurance cost?
Title insurance is a one-time fee, not a recurring expense. An owner’s title insurance is related to the property purchase price, whereas a lender’s policy is based on the expected total loan amount. Typically, both policies cost 0.5% to around 1% of the home purchase price, or $2,000 to $4,000 on a $400,000 home, according to the American Land Title Association (ALTA).
In certain states in the U.S., the price for title insurance is the same no matter which title company you choose to work with. For others, you’re more likely to save up to $500 by shopping around. As a homebuyer, there are no restrictions on the title company to work with, and you could get recommendations from your real estate agent and lender.
Who pays for title insurance?
When deciding on who pays for title insurance, the actual law on this issue varies from state to state. Sometimes, it can even change from county to county. However, a buyer is almost always responsible for paying for lenders’ title insurance since they are the ones taking out a mortgage.
As for the owner’s title insurance, the buyer or seller may negotiate who should take up the cost since it is optional. Although, it is more common for sellers to foot the cost to sweeten the deal on their home. You should check with your local laws to determine who is responsible for covering the cost of the owners’ title insurance policy.
What does a title insurance policy cover?
The amount of coverage you receive when you purchase a title insurance policy depends on how much you are willing to spend. So, if you’re looking to obtain an owner’s policy, you should be careful about letting the seller handle the process. While the seller may be saving you thousands of dollars, you may end up with a limited policy.
Typically, a title insurance policy covers most of the following:
- Back taxes
- Conflicting wills
- Filing errors
- Fraud
- Liens from HELOCs, unpaid contractor bills, or other companies
- Spousal claims
- Title forgeries
- Undocumented easements
- Unknown heirs who claim ownership of the estate
Again, like other forms of insurance, you have the right to modify your insurance policy to accommodate your unique needs. It would be helpful to discuss with your lender to determine what should be covered under their insurance policy.
Where to buy title insurance?
Buying a home can be a challenging and risky adventure. A title insurance policy from a trustworthy title company is your best bet to mitigate potential risks and financial loss.
Ask your lender for recommendations or shop around for better offers when choosing your title insurance company. You may want to work with a title company that you can expect to still be around decades after you have purchased your home. More importantly, ask about any discount programs. You may be eligible for discounts as a first-time homebuyer.
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