What Is Title Insurance?
Title insurance is a type of indemnity insurance that protects you as a lender or homebuyer from financial loss due to defects in a property's title. The most common form is lender’s title insurance, which you as the borrower buy to protect the lender. The other type is owner’s title insurance, often paid for by the seller to protect your equity in the property.
Understanding Title Insurance
You need a clear title for any real estate transaction to ensure the property is free from liens. Title companies perform a search on every title to check for claims or liens before issuing it. This title search examines public records to confirm legal ownership and identify any claims on the property. Issues like erroneous surveys or unresolved building code violations can make the title 'dirty.'
Title insurance covers you against loss or damage from liens, encumbrances, or defects in the title or ownership. Common claims include back taxes, liens from mortgages or HELOCs, easements, and conflicting wills. Unlike traditional insurance that covers future events, title insurance handles claims from past occurrences.
A basic owner’s title insurance policy covers hazards such as ownership by another party, incorrect signatures including forgery and fraud, flawed records, restrictive covenants like unrecorded easements, and encumbrances or judgments like outstanding lawsuits and liens. In some private transactions, you might see a warranty of title instead, where the seller guarantees they can transfer ownership without others having rights to the property.
Types of Title Insurance
There are two types: lender’s title insurance and owner’s title insurance, including extended policies. Almost all lenders require you to purchase lender’s title insurance to protect them if the seller couldn’t legally transfer ownership rights. This policy only covers the lender against loss, and issuing it means a title search has been completed, giving you some assurance as the buyer.
Title searches aren’t perfect, so you remain at risk of financial loss, which is why owner’s title insurance provides extra protection. While lender’s insurance is required for your mortgage, owner’s insurance is optional and often bought by the seller to protect you from title defects. You should consider owner’s title insurance once you own the home, especially as you pay down your mortgage and own more of the property—you have more to lose if a claim arises, particularly if you plan to stay long-term.
Purchasing Title Insurance
An escrow or closing agent starts the insurance process after the purchase agreement is complete. Major U.S. title insurance underwriters include Fidelity National Financial Inc., First American Title Insurance Co., Old Republic National Title Insurance Co., and Stewart Title Guaranty Co., along with regional options.
The cost for owner’s title insurance ranges from $500 to $3,500, based on your state, the provider, and the home’s purchase price. Often, you need both lender’s and owner’s policies to protect everyone involved. You pay a one-time fee at closing. The Real Estate Settlement Procedures Act prevents sellers from forcing you to use a specific carrier to avoid abuse. While your lender, lawyer, or agent might suggest a company, you should shop around for the best deal.
Risks of Not Having Title Insurance
Without title insurance, you face significant risk if a title defect exists. Imagine you buy your dream home and discover unpaid property taxes from the previous owner after closing—without insurance, you bear the full financial burden and could lose the home to the taxing authority.
With title insurance, it protects you as long as you own or have an interest in the property. Lender’s title insurance similarly covers banks from unrecorded liens, access rights, and other defects; in a default, the lender is protected up to the mortgage amount. If you’re a real estate investor, ensure the property has a clear title before buying—foreclosure homes often have issues, so consider owner’s insurance to guard against claims.
The Bottom Line
Title insurance is indemnity coverage that protects you from financial loss due to claims against a title, like outstanding liens, back taxes, and conflicting wills. The two types are lender's, which you buy to protect the lender and is usually required, and owner's, often purchased by the seller to protect you and less common. The risk without it is too high, potentially leaving you vulnerable to major financial issues if title problems emerge.
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