As a homebuyer, you get the deed upon closing, but your ownership rights may not be watertight without the protection of a title insurance policy. Suppose you later discover that the seller wasn’t the true owner. Or, someone sues you saying they had a prior claim to the property.
Buyers get a title search to try to make sure the property is free of liens, claims, or encumbrances. However, some title defects aren’t discovered until after closing — and that’s where title insurance can protect against financial headaches. Read on to learn how title insurance works and what it covers.
What is title insurance and what does it cover?
Title insurance protects against a worst-case scenario of homeownership: something goes wrong with the transfer of the title. A title insurance policy provides financial protection for a homeowner or mortgage lender against losses that result from a defective or bad title, or an ownership claim on the property. For example, fraudulent ownership is one reason that a title could later be found to be defective, a risk that would be covered with a homeowner’s title insurance policy.
Sometimes serious title problems are overlooked during the title search prior to the sale, or they might not arise until long after the property sale is closed. Potential title issues can include outstanding mortgages, liens on the property, legal action against the previous owner that affects the property, or even more outlandish scenarios like a previously unknown heir of the prior property owner coming out of the woodwork claiming ownership of the home.
A title defect could also be the result of deliberate criminal actions, such as forged documents that are presented by the seller during the purchase transaction, or an identity thief who tries to profit by selling a house they don’t actually own. Human error also can sometimes cause title problems, such as simple clerical mistakes with paperwork, measurement discrepancies in the property lines, or errors in historical property records.
Title insurance covers financial losses that arise from legal claims against the property due to issues with the title, and it also covers legal fees related to litigating or settling such claims. Title insurance is an unusual type of insurance in that it protects against losses due to events that occurred prior to the policy’s date of issue. This is unlike most insurance policies — like auto or life insurance — that cover losses that happen after the policy starts.
Owner’s title insurance policy vs. lender's title insurance policy
Both homebuyers and mortgage lenders can purchase title insurance to protect their financial stake. The two different types of title insurance are referred to as owner’s policies and lender’s policies.
Among other homebuyer requirements, most mortgage lenders require a homebuyer to pay for a lender’s title insurance policy as part of securing a mortgage loan. Lender’s policies protect the financial interest of the bank or mortgage lender, typically up to the amount of the mortgage. The policy is issued to the mortgage lender and protects against title defects that may be discovered after the financing is done. The lender’s title insurance policy remains in effect until the mortgage is fully paid off or refinanced, or the home is sold.
Owner’s title insurance policies, on the other hand, protect the homebuyer against any financial losses arising from title defects that are discovered only after the property is sold. It is issued to the homebuyer and covers an amount up to the home’s purchase price as well as any legal costs related to title or ownership problems.
Note that it is not mandatory to have an owner’s policy, but it can serve as an added precaution. If you get an owner’s title insurance policy, either the seller or the buyer may pay the premium, depending on the terms of the sale. The coverage is effective as long as you own the property.
|Examples of title defects covered under a title insurance policy|
Do I need an owner’s title insurance policy?
Owner’s title insurance policy is not required for a home purchase like a lender’s policy often is. Still, it can be a good idea to get one, as it protects your financial interest in the home against title-related claims for as long as you own it.
Owner’s title insurance might be worth it for the peace of mind, considering the risk that undiscovered title defects could potentially cost you a lot of money in back taxes, unpaid liens, or legal bills — or even invalidate your ownership of the property.
How much is title insurance and how to get it?
Buying title insurance is a one-time expense. The cost of title insurance is typically around 0.50% of the price of the home, according to the American Land Title Association. For a $250,000 home, for example, an owner’s title insurance policy might cost you around $1,250. You pay a single, upfront premium. While an owner’s title insurance policy is an additional cost, the protection it brings lasts for as long as you have ownership of the home.
Sellers often pay for the owner’s title insurance policy, though practices vary in different regions. Regardless of the local customs on how to get title insurance, which party will pay the premium can be up for negotiation during the home purchase process.
Shopping for title insurance
Owner’s title insurance policies are sold by title insurance companies. As for where to buy title insurance, your real estate agent, mortgage lender, or home builder will usually refer you to a title insurer. However, you’re not limited to using the company they recommend. In fact, you might be able to save money by spending some time shopping for title insurance and getting premium quotes from several title insurance companies.
It’s a good idea to confirm that the title insurance company you choose is licensed with your state insurance department. And whether you’re a first-time homebuyer or someone who’s done this before, don’t forget that you can negotiate — you may be able to get the seller to pick up some or all of the title insurance costs.
Once you complete the home purchase and get the keys to your new property, remember to keep your copy of the title insurance policy safely stored away, perhaps together with the deed. If you should ever need to submit a claim, you’ll need to have the policy documents, and that could be years in the future. Remember, some title defects may not be discovered until it comes time to sell your house.
If you’re a homebuyer and want help weighing the pros and cons of getting a title insurance policy, reach out to a Finance of America Mortgage Advisor.