When you buy a house, youll pay a number of closing costs in addition to the homes price. These could include things like attorney and closing fees, homeowners insurance, initial property tax payments, and more. If you take out a loan, one of the closing costs will likely be something called title insurance.
What is title insurance? In this piece, well answer that question, explain why you need it, and discuss the different types of title insurance before helping you navigate how to buy it.
A title represents the legal rights surrounding the ownership of a piece of property. Unlike a car title, a house title isnt a physical document. Rather, its a legal conception of a bundle of rights that a property owner has. It means you have the right to possess the property; use the property; enjoy it how you wish; limit who enters the property; as well as sell, rent, or transfer ownership as you see fit.
A title may be limited by the law, easements or liens on the property, or homeowners association (HOA) loans. They may sound straightforward, but titles may become subjects of contention during sales, or even after youve already closed on a property. Thats one reason why title insurance is so important.
Title insurance protects both lenders and homebuyers from financial loss if somebody contests the title to a property or other issues with the title. A clear title is essential for any real estate transaction.泭
Before closing, a buyer or their lender should enlist a title search company to check public records for claims or liens against the property. Title companies should ensure a clean title before a buyer continues on with a purchase.
That said, even if a title search verifies a clean title, its not an infallible process. There are a number of issues that could impact the title. Common claims filed against a title include back taxes, liens from previous lenders, and conflicting wills. Title defects could also include issues like erroneous surveys, unresolved building code violations, or outstanding debts to contractors.
While traditional insurance protects against the future, title insurance protects against claims from the past that title searches may miss. As such, a basic title insurance policy typically covers the following hazards:
Title insurance covers any claim against a title that comes after closing. Real estate is a dicey business, especially when it comes to old homes that have passed through many owners. Its possible the current owner doesnt know about existing claims or encumbrances. Likewise, an overlooked heir to a property may have rights without knowing it.
There are two types of title insurance: lenders title insurance and owners title insurance.泭
If youre taking out a loan to buy a house, nearly all lenders require you to also purchase a lenders title insurance policy. This protects the lender in the event that youre not able to legally transfer the title of ownership rights in the future. A lenders title insurance policy only protects the lender against loss and is only issued after the completion of a title search.
Since you get a lenders title insurance policy only after a completed title search, theres some assurance that the title wont become a problem in the future. But, again, title searches arent infallible. If it seems a little unfair that youre paying for a lenders right to recoup any losses on a loan they approved, well, youre right. It is!
Youre still at risk of financial loss if a title dispute arises. As such, you can secure the additional protection of an owners title insurance policy. This optional purchase protects a buyer against defects in the title. Its an extra expense but, remember, the lenders policy youre already paying for wont do anything for you.
Do you need title insurance? If you havent deduced yet that, yes, you need title insurance, lets state it plainly: You need title insurance.
If youre buying a home with a loan, lenders title insurance is likely mandatory. If youre buying with cash, you should still get an optional owners title insurance policy. Having no title insurance exposes you to significant risk down the road. Title searches are good but they are not perfect. If you find out years after buying that a previous owner owed thousands of dollars in property taxes, youre liable to pay them in addition to penalties. If someone emerges with a legitimate claim to a property promised to them by the previous owners, you may be in trouble without title insurance.
In both these instances, failing to pay the taxes or win a challenge in court will result in losing the property for nothing.
Even lenders insurance although far more beneficial for the lender offers some protection for buyers. Lenders title insurance covers banks and mortgage lenders from unrecorded liens, unrecorded access rights, and other title defects. If a borrower defaults on the loan because of a title defect, the insurance company reimburses the lender for the full amount of the mortgage rather than the buyer.
Owners title insurance, like most insurance, might feel like a waste of money if you never need it. But thats what insurance is, isnt it? Its invaluable help in a worst-case scenario. An owners title insurance policy protects you against losing equity or even losing your right to live in a home due to a title defect. Even if a title dispute is unlikely, youll be happy you have title insurance when the alternative is potentially ruinous.
Ask your real estate agent or real estate attorney about purchasing owners title insurance during the closing process. After completing the property purchase agreement, an escrow or closing agent can initiate the insurance process.泭
There are four major U.S. title insurance underwriters: Fidelity National Financial, First American Title Insurance Company, Old Republic National Title Insurance Company, and Stewart Title Guaranty Company. You can also shop for smaller regional title insurance companies.
An owners title insurance policy typically costs between $500 and $3,500 depending on the state you live in, your insurance provider, and your homes purchase price. Note, thats a one-time payment that covers the duration of your stay in the home.
Sometimes, insurance underwriters require packaging a lenders policy and owners policy together to ensure everyone is protected. In those instances, both lender and homebuyer purchase title insurance together. In these instances, both policies together usually cost of the homes purchase price according to the American Land Title Association (ALTA). In some instances, that may save you money on title insurance.
If youre on your own shopping for a title insurance policy, ask for recommendations from the seller, your real estate agent, and your lender. Your lenders recommendation may be the best considering their financial interests in the property align with yours, but all three sources could have some incentive for recommending individual title companies. Dont make a decision without doing your own research.
To find a title insurance company, explore options from each of the four major title insurers. Old Republic, Fidelity National, First American Title, and Stewart all offer rate calculators online. If you dont like what you see there, search the for smaller companies in your state and contact them individually for estimates.泭
Most forms of insurance protect you from future events. Title insurance protects you from events overlooked in the past. Weve all heard about how the past can come back to bite you, right? When it comes to real estate, you do not want to get bitten with a title claim or defect. Purchasing title insurance for a one-time fee will give you the protection you need to avoid incurring previous owners debts or risk losing the house for nothing.
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