What Is Title Insurance, and Do You Need It?

Vault’s Viewpoint

• Title insurance protects you from financial damages that arise when someone else has a previous ownership claim on your property.
• You normally pay for title insurance as a single premium as part of your mortgage closing.
• Title insurance doesn’t protect you in the event that you caused the issue after buying the home.

Title Insurance: What It Is and How It Works

In general, the title indicates ownership of a property. When you buy a home, a title company usually searches the ownership records to determine whether the title is clean and that the current owner does, in fact, own the home and has the legal right to pass it on to you.

However, even when a title search is completed, there’s no guarantee that someone else doesn’t have a claim to the property. In fact, a title claim can come up years after you’ve owned the home. Some of the common defects that might appear on a title’s history include:

• Liens. A lien is a claim against the property for unpaid bills, such as property taxes, mortgage payments or even contracting work done before you bought the house and that wasn’t paid for by the previous owner.
• Encumbrances. In addition to liens, other types of encumbrances might include specific zoning laws or homeowners association requirements that can impact how you use your property and the types of fines associated with past misuse.
• Easements. Some properties come with rights for others to access the property, even if you own it. This can include utility easements, which restrict where and how you use areas of your property so that the company has access.

The purpose of title insurance is to financially protect you and your mortgage lender if someone makes a claim of ownership on your property due to one of these issues. It can prevent you from being required to pay hundreds, or even thousands of dollars, to resolve past bills that aren’t your fault.

What Are the Types of Title Insurance?

There are two main types of title insurance. One is designed to protect the lender if an ownership problem is large enough that you have to forfeit the property (and no longer pay the mortgage). The other type is meant to protect you, the owner, if it turns out someone else has a claim against the property.

Lender’s Title Insurance

Lender’s title insurance allows your mortgage lender to recoup the principal balance of the mortgage in the event you no longer own the home due to an ownership claim.

For example, there might be an heir to the home that didn’t realize they had ownership. Another potential issue could arise if your home was sold fraudulently. In both cases, you don’t want to keep making mortgage payments on a home you don’t own. The lender can’t foreclose on the house to force you to pay in these cases, either.

With lender’s title insurance, the lender can file a claim with the title insurance company and receive the money it expected to get from you over the course of loan repayment.

Owner’s Title Insurance

Owner’s title insurance protects you, the homebuyer, in these circumstances. If a previous owner didn’t pay property taxes or if they owe money to a contractor for building an addition to the home, you don’t want to be on the hook for these costs.

If you’re covered by an owner’s title insurance policy, a claim can help you pay these costs. The title insurance company will pay off the amounts owed, clearing the ownership claims to the property and saving you from having to pay steep bills to stay in the house.

Unlike lender’s title insurance, which is usually required when you buy a home, owner’s title insurance is often optional. In some cases, the seller might even be responsible for paying the one-time owner’s title insurance premium.

What Is Covered With Title Insurance?

While a title search is supposed to catch most issues so they can be resolved before you close on the home, a search might not catch everything. Title insurance kicks in when something comes up later. Perhaps a neighbor instigates a boundary dispute, and it turns out there was a property survey error. Your title insurance policy will cover financial costs and damages associated with subsequent adjustments.

Some of the other issues that might come up after you bought the home might be related to:

• Permit or building code problems from changes made by a previous owner
• Inheritance issues, such as conflicting wills or a previously unknown heir
• Divorce problems, including when an ex-spouse should have been able to sign off the sale but didn’t or when a portion of the proceeds from the home was supposed to have gone to an ex-spouse
• Errors on the property deed
• Documents that were recorded improperly or have errors
• Fraudulent activity, such as forged documents that led to the sale
• Liens placed on the property to cover unpaid property taxes, contractor bills or other lenders

If a previous owner made mistakes or the property was sold to you fraudulently, title insurance prevents you from being held accountable for a situation you didn’t create.

What Is Not Covered With Title Insurance?

Title insurance is designed to protect you from previous issues you didn’t know about. For the most part, if you’d realized that these problems existed, you might not have bought the home.

However, title insurance doesn’t protect you from issues arising from your actions after buying the property. For example, if you decide to build an addition and are fined because the extra room wasn’t properly permitted and you have building code violations, title insurance won’t cover those fines.

Additionally, title insurance doesn’t usually cover the costs when a government entity claims eminent domain. In that situation, you’re normally compensated for the property at the current market rate, but that might not be enough to pay off your entire mortgage. Title insurance doesn’t provide coverage in that situation.

Typical Costs of Title Insurance

Using research from Fannie Mae, title company First American found that title insurance costs, on average, about 0.42% of a property’s purchase price. However, the actual price of title insurance varies depending on the cost of the property and the loan amount. Some estimates say you could pay between 0.5% and 1.0% of the home’s purchase price.

• Lender’s title insurance is usually purchased by the homebuyer and is based on the loan amount. It’s generally required as a part of the closing process.
• Owner’s title insurance is optional in some cases. Depending on the state, the seller might be responsible for purchasing owner’s title insurance. Even though it’s optional, you might decide to purchase a policy for peace of mind.

The good news is that title insurance is a one-time purchase fee, so you don’t have to keep paying over time. You pay for title insurance as part of the closing, and you’re covered for as long as you and your heirs own the property.

Where You Can Purchase Title Insurance

When you buy a home, the lender usually has a preferred title company they work with. You can choose to purchase title insurance through that company, or you can shop around.

You aren’t required to use the recommended title company, and the Consumer Financial Protection Bureau (CFPB) suggests that shopping around could save you up to $500.

If you’re looking for a list of title insurance companies in your area, the American Land Title Association has a list of registered companies and a state search function. Major title companies include Old Republic, First American and Fidelity.

Pros and Cons of Title Insurance: Is It Worth It?

Pros

• Financial protection in the event that someone places a lien on the property for unpaid taxes, bills or mortgage payments
• Protects you in the event of fraudulent documents or other irregularities that call into question your ownership of the property
• Helps you cover costs related to easements or other issues that can impact your ability to use your property

Cons

• Cost of title insurance can feel high when you’re looking at a list of closing costs.
• Doesn’t cover all issues, such as eminent domain or problems that arise due to your mistakes
• The seller doesn’t always cover the cost of owner’s title insurance, so you might need to pay for it if you want the coverage. You’re usually required to purchase lender’s title insurance