What Is Title Insurance and Do You Need It?

How Does Title Insurance Work?

Title insurance is a form of insurance coverage that protects against financial or legal claims that may have been attached to your home before you purchased it.

How Title Insurance Works

Title insurance is designed to shield your mortgage lender (and you, if you opt for owner's title insurance) from claims arising from the past that could jeopardize your rightful ownership of—or title to—your home after you close on the purchase.

Included with a title insurance policy is a title search—a professional review of public records tracing the property's ownership history and any financial obligations that may have been attached to it by previous owners. Examples of these include:

• Unpaid liens or tax bills
• Inaccurate or misplaced public records related to the property
• Undisclosed heirs of previous owners who might claim a stake in the property

The seller must resolve past issues uncovered in a title search on or before your closing date, and title insurance provides protection against claims predating the sale that may arise after closing.

Types of Title Insurance

There are two types of title insurance policies: a lender's policy and an owner's policy. As the names imply, the lender's policy is designed to protect a mortgage lender that uses the home as collateral on your mortgage loan, while an owner's policy protects you, the owner. Policies typically carry a maximum payout amount equal to the value of the house when you purchase it.

When you take out a mortgage, your lender will require you to purchase a lender's title insurance policy to safeguard their interest in the property. The lender's policy covers only the portion of the loan you still owe—so it won't be for the home's full purchase price if you make a down payment—and the coverage expires once you've paid your mortgage in full.

If you refinance your mortgage or take out a loan secured by the equity in your home, you may be required to get an additional lender's title insurance policy. If you purchase your new policy from the provider that issued your original policy, you may be eligible for a discounted renewal rate.

An owner's title insurance policy protects you from claims against your equity in the property, up to the purchase value of the house. An owner's title insurance policy remains in force as long as you own the property and can even protect your heirs until they take title to the property or transfer it to a new owner.

What Does Title Insurance Cover?

A title insurance company will assume the costs of a legal defense if you are sued by anyone making a claim against your property. If the court finds against you, it will cover the cost of settling with the claimant for a sum up to the amount of your policy limit, which is typically the purchase price of the home.

Title insurance can protect you against the following issues that come to light after you close on the purchase of your home:

• Liens, unpaid taxes and other title defects that escaped detection in your title search, for reasons including inaccurate public documents, errors or oversights in the filing of public records
• Property boundary disputes that arose but were left unresolved when you bought the property
• Undisclosed heirs who may not have been properly notified following the death of the previous owner, and who claim a stake in the property
• Disputes to a will that gave the seller standing to sell you the home
• Challenges to the mental fitness or capacity of the seller who transferred ownership to you
• Forgery, impersonation or other criminal actions aimed at laying false claims on the property

What Does Title Insurance Not Cover?

Title insurance won't cover you against issues or financial obligations incurred after you take ownership of the property, such as:

• Property boundary disputes that come to light after you purchase the home
• Taxes, homeowners association fees or other financial obligations you incur but fail to pay
• Foreclosure in the event you fail to make your mortgage payments
• Government seizure of property through eminent domain proceedings

Who Pays for Title Insurance?

The buyer typically chooses the lender's title insurance provider and pays their premium as part of the closing costs on the home.

Payment responsibility for owner's title insurance can fall to either party in a home sale. It's not unusual for the seller to pay for an owner's title insurance policy for the seller, as part of closing arrangements. The homebuyer (or homeowner, in the event of refinance or home equity loan) may also pay for their own owner's title insurance, and may get a discount if they bundle it with their lender's title insurance policy.

How Much Does Title Insurance Cost?

The cost of title insurance can depend on the state where the insured property is located. For lender's title insurance, expect to pay between 0.1% and 2% of the home's purchase price. So, for a home that costs $500,000, you may pay between $500 and $10,000.

Owner's title insurance policies are less expensive than lender's policies, and typically cost a few hundred dollars.

Do You Need Title Insurance?

You will be required to purchase at least lender's title insurance if you have a mortgage. While you are not required to purchase owner's title insurance, it may be a good idea to protect your investment in your home.

Do I Need Title Insurance if I Have No Mortgage?

If you purchase your home for cash, there's no need for a lender's title insurance policy, but an owner's policy (and title search) could still protect you from unforeseen claims against the property. Some experts argue that an owner's policy is optional if you don't plan to keep the property long, but a claim against your title could throw a wrench into your ability to "flip" a property, and also put a dent in your potential profits.

How to Buy Title Insurance

1. Research providers. Some title insurance companies operate nationwide, but many are specific to a state or region. A search on the name of your state and "title insurance providers" can help generate a list of companies to investigate.
2. Check references. Some additional online research can help narrow your list. Look for customer reviews on the companies you've identified, and pick the ones that stand out as offering reasonable rates and good customer service. Consider seeking guidance from trusted real estate professionals, but keep in mind that title insurers in some states pay hefty fees for referrals, so it's fair to ask if your adviser has a vested interest in any companies. Also, consider asking for the names of other clients who have used companies they recommend, and following up with those customers to gauge their level of satisfaction.
3. Compare rates. Once you've pared your list of potential providers down to a manageable handful, reach out to them via phone, email or on their websites to request quotes. You'll need to furnish some basic information on the house in question, including its address, the year it was built and the anticipated purchase price.
   • Make sure to specify that the quotes include all fees as well as the estimated title insurance premium.
   • If you're considering an owner's policy as well as a lender's policy, let them know and ask about discounts for bundling both forms of coverage.

   In some states, title insurance rates are regulated so comparison pricing is less necessary. Even in those places, it can be helpful to approach several providers to compare fees and/or their responsiveness and customer service.

4. Finalize your choice. Take your pick and notify your real estate support team (agent and attorney) so they can get the ball rolling on the title search and closing.

The Bottom Line

If you plan to take out a mortgage, a lender's title insurance policy is in your future, and owner's title insurance is well worth considering. Even if you buy a house for cash or inherit it outright, an owner's policy could protect you against the (rare, but potentially costly) possibility of a challenge to your ownership of the property. For a small fraction of the overall cost of a home, title insurance is a good investment for many homeowners.